Datasets:

gtfintechlab
/

ipo-text

+ RISK FACTORS Our business, financial condition and results of operations are subject to various risks, including those discussed below, and those set forth in Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009, which are incorporated herein by reference and may affect the value of our securities. The risks discussed in this prospectus and incorporated herein by reference are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially. Before making a decision to invest in our common stock, you should carefully consider the risks and uncertainties described below and the risks incorporated by reference in this prospectus, together with all of the other information included or incorporated by reference in this prospectus. This offering will substantially dilute the ownership percentage of our existing shareholders, and the ownership of our common stock may change significantly. We intend to raise significant capital through this offering. Our directors and executive officers and individuals who reside in our markets currently hold a significant percentage of our common stock. Upon the successful completion of this offering, the ownership percentage of existing shareholders will be substantially diluted unless they purchase shares in this offering in an amount proportional to their existing ownership. As a result, following this offering a significant portion of our common stock may be held by individuals and institutions outside of our market area whose interests may differ from our current shareholders. In addition, one or more individuals or institutions may seek to acquire a significant percentage of ownership in our common stock in this offering, subject to any applicable regulatory approvals. Those shareholders may have interests that differ from those of our current shareholder base, and they may vote in a way with which our current shareholders disagree. Our management has broad discretion over the use of proceeds from this offering. Our management has significant flexibility in applying the proceeds that we receive from this offering. Although we have indicated our intent to use the proceeds from this offering for general corporate purposes, including funding future acquisitions, our working capital needs and additional contributions to the capital of our Bank. Our management retains significant discretion with respect to the use of such proceeds. The proceeds of this offering may be used in a manner which does not generate a favorable return for us. We may use the proceeds to fund future acquisitions of other businesses, and there is no assurance that any business we acquire would be successfully integrated into our operations or otherwise perform as expected. If, as a result of this offering or otherwise, an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a bank holding company. Any entity, including a group composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a controlling influence over us, may be subject to regulation as a bank holding company in accordance with the Bank Holding Company Act of 1956, as amended (the BHC Act ). In addition, (i) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve ) under the BHC Act to acquire or retain 5% or more of our outstanding securities and (ii) any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder s investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking. Table of Contents We may issue additional securities in the future, which would dilute your ownership if you did not, or were not permitted to, invest in the additional issuances. In the future, we may seek to raise capital through offerings of our common stock, preferred stock, securities convertible into common stock, or rights to acquire such securities or our common stock. Under our amended and restated articles of incorporation, we have additional authorized shares of common stock and preferred stock that we can issue from time to time at the discretion of our board of directors, without further action by the shareholders, except where shareholder approval is required by law or NASDAQ. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to the ownership percentage of our existing shareholders. Holders of our shares of common stock have no preemptive rights that entitle them to purchase their pro rata shares of any offering of shares of any class or series and, therefore, our shareholders may not be permitted to invest in future issuances of our common stock and as a result will be diluted. Our inability to use a short form registration statement on Form S-3 may affect our short-term ability to access the capital markets. The ability to conduct primary offerings under a registration statement on Form S-3 has benefits to issuers that are eligible to use this short form registration statement. Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended (the Exchange Act ). In addition, Form S-3 enables eligible issuers to conduct primary offerings off the shelf under Rule 415 of the Securities Act. The shelf registration process under Form S-3, combined with the ability to incorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering on Form S- 1. One of the requirements for Form S-3 eligibility is for an issuer to have timely filed its Exchange Act reports (including Form 10-Ks, Form 10-Qs and certain Form 8-Ks) for the 12-month period immediately preceding either the filing of the Form S-3 or a subsequent determination date. During 2009, we did not timely file on Form 8-K certain required financial statement information with respect to the American United transaction (although such information was filed on March 15, 2010). Therefore, we will not able to use Form S-3 before January 9, 2011. We may experience delays in our ability to raise capital in the capital markets during the period that we are unable to use Form S-3. Any such delay may result in offering terms that may not be advantageous to us or may cause us not to obtain capital in a timely fashion to execute our business strategies. The FDIC could condition our ability to acquire a failed depository institution on compliance by us and certain of our investors with additional requirements. We may seek to acquire one or more failed depository institutions from the FDIC. As the agency responsible for resolving failed depository institutions, the FDIC has the discretion to determine whether a party is qualified to bid on a failed institution. On August 26, 2009, the FDIC adopted a Statement of Policy on Qualifications for Failed Bank Acquisitions (the Statement of Policy ). The Statement of Policy sets forth a number of significant restrictions and requirements as a condition to the participation by certain private investors and institutions in the acquisition of failed depository institutions from the FDIC. Among the requirements would be that the Bank maintain higher capital ratios for a three-year period of time following the acquisition of a failed depository institution from the FDIC, which would impair our ability to grow in the future without obtaining additional capital. Based on our understanding of current interpretations of the Statement of Policy, we do not believe the provisions of the Statement of Policy would apply to us. However, if the Statement of Policy were deemed to apply to us, and we or our investors were unwilling to comply with conditions imposed by the FDIC, then we may not be permitted to acquire failed institutions from the FDIC. Table of Contents We are subject to certain risks related to FDIC-assisted transactions. The success of past FDIC-assisted transactions, and any FDIC-assisted transactions in which we may participate in the future, will depend on a number of factors, including the following: our ability to fully integrate, and to integrate successfully, the branches acquired into the Bank s operations; our ability to limit the outflow of deposits held by our new customers in the acquired branches and to successfully retain and manage interest-earning assets (loans) acquired in FDIC-assisted transactions; our ability to retain existing deposits and to generate new interest-earning assets in the geographic areas previously served by the acquired banks; our ability to effectively compete in new markets in which we did not previously have a presence; our success in deploying the cash received in the FDIC-assisted transactions into assets bearing sufficiently high yields without incurring unacceptable credit or interest rate risk; our ability to control the incremental non-interest expense from the acquired branches in a manner that enables us to maintain a favorable overall efficiency ratio; our ability to retain and attract the appropriate personnel to staff the acquired branches; and our ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches. As with any acquisition involving a financial institution, particularly one involving the transfer of a large number of bank branches as is often the case with FDIC-assisted transactions, there may be higher than average levels of service disruptions that would cause inconveniences or potentially increase the effectiveness of competing financial institutions in attracting our customers. Integrating the acquired branches would not be an operation of substantial size and expense that we are not familiar with, but we anticipate unique challenges and opportunities because of the nature of the transaction. Integration efforts will also likely divert our management s attention and resources. It is not known whether we will be able to integrate acquired branches successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the FDIC-assisted transactions. We may also encounter unexpected difficulties or costs during the integration that could materially adversely affect our earnings and financial condition, perhaps materially. Additionally, we may be unable to achieve results in the future similar to those achieved by our existing banking business, to compete effectively in the market areas previously served by the acquired branches or to mange any growth resulting from FDIC-assisted transactions effectively. Our willingness and ability to grow acquired branches following FDIC-assisted transactions depend on several factors, most importantly the ability to retain certain key personnel that we hire or transfer in connection with FDIC-assisted transactions. Our failure to retain these employees could adversely affect the success of FDIC-assisted transactions and our future growth. Our ability to continue to receive benefits of our loss share arrangements with the FDIC is conditioned upon our compliance with certain requirements under the agreements. We are the beneficiary of loss share agreements with the FDIC that call for the FDIC to fund a portion of our losses on a majority of the assets we acquired in connection with our recent FDIC-assisted transactions. Our ability to recover a portion of our losses and retain the loss share protection is subject to our compliance with certain requirements imposed on us in the agreements. The requirements of the agreements relate primarily to our administration of the assets covered by the agreements, as well as our obtaining the consent of the FDIC to Table of Contents engage in certain corporate transactions that may be deemed under the agreements to constitute a transfer of the loss share benefits. For example, any merger or consolidation of the Bank or any public or private offering of common stock by us that would increase our outstanding shares by more than 9%, including this offering, requires the consent of the FDIC. In such instances in which the consent of the FDIC is required under the loss share agreements, the FDIC may withhold its consent to such transactions or may condition its consent on terms that we do not find acceptable. While we obtained the FDIC s consent in connection with this offering through the payment of a consent fee to the FDIC, there can be no assurance that, in the future, the FDIC will grant its consent or condition its consent on terms that we find acceptable. If the FDIC does not grant its consent to a transaction we would like to pursue, or conditions its consent on terms that we do not find acceptable, this may cause us not to engage in a corporate transaction that might otherwise benefit our shareholders or we may elect to pursue such a transaction without obtaining the FDIC s consent, which could result in termination of our loss share agreements with the FDIC. We engage in acquisitions of other businesses from time to time, including FDIC-assisted acquisitions. These acquisitions may not produce revenue or earnings enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties. When appropriate opportunities arise, we will engage in acquisitions of other businesses. Difficulty in integrating an acquired business or company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence or other anticipated benefits from any acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of our business or the business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. We are likely to need to make additional investment in equipment and personnel to manage higher asset levels and loan balances as a result of any significant acquisition, which may materially adversely impact our earnings. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. In evaluating potential acquisition opportunities, we may seek to acquire failed banks through FDIC-assisted transactions. While the FDIC may, in such transactions, provide assistance to mitigate certain risks, such as sharing in exposure to loan losses, and providing indemnification against certain liabilities, of the failed institution, we may not be able to accurately estimate our potential exposure to loan losses and other potential liabilities, or the difficulty of integration, in acquiring such institutions. Depending on the condition of any institution that we may acquire, any acquisition may, at least in the near term, materially adversely affect our capital and earnings and, if not successfully integrated following the acquisition, may continue to have such effects. FDIC-assisted acquisition opportunities may not become available and increased competition may make it more difficult for us to bid on failed bank transactions on terms we consider to be acceptable. Our near-term business strategy includes consideration of potential acquisitions of failing banks that the FDIC plans to place in receivership. The FDIC may not place banks that meet our strategic objectives into receivership. Failed bank transactions are attractive opportunities in part because of loss-sharing arrangements with the FDIC that limit the acquirer s downside risk on the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the nondeposit liabilities that we assume. In addition, assets purchased from the FDIC are marked to their fair value and in many cases there is little or no addition to goodwill arising from an FDIC-assisted transaction. The bidding process for failing banks could become very competitive, and the increased competition may make it more difficult for us to bid on terms we consider to be acceptable. Table of Contents

parsed_sections/risk_factors/2010/AMRC_ameresco_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our Class A common stock involves a high degree of risk. In deciding whether to invest, you should carefully consider the following risk factors. Any of the following risks could have a material adverse effect on our business, financial condition and operating results and cause the value of our Class A common stock to decline, which could cause you to lose all or part of your investment. When determining whether to invest in our Class A common stock, you should also refer to the other information in this prospectus, including the consolidated financial statements and related notes. If demand for our energy efficiency and renewable energy solutions does not develop as we expect, our revenue will suffer and our business will be harmed. Our revenue has increased significantly since January 1, 2005. We believe, and our growth expectations assume, that the market for energy efficiency and renewable energy solutions will continue to grow, that we will increase our penetration of this market and that our revenue from selling into this market will continue to increase. If our expectations as to the size of this market and our ability to sell our products and services in this market are not correct, our revenue will suffer and our business will be harmed. The projects we undertake for our customers generally require significant capital, which our customers or we may finance through third parties, and such financing may not be available to our customers or to us on favorable terms, if at all. Our projects are typically financed by third parties. The cost of these projects to our customers can reach up to $200 million. For our energy efficiency projects, we often assist our customers in arranging third-party financing. For small-scale renewable energy plants that we own, we typically rely on a combination of our working capital and debt to finance construction costs. The significant disruptions in the credit and capital markets in the last several years have made it more difficult for our customers and us to obtain financing on acceptable terms or, in some cases, at all. If we or our customers are unable to raise funds on acceptable terms when needed, we may be unable to secure customer contracts, the size of contracts we do obtain may be smaller or we could be required to delay the development and construction of projects, reduce the scope of those projects or otherwise restrict our operations. In 2008, we entered into a $50 million revolving senior secured credit facility that matures in June 2011. Availability under the facility is based on two times our EBITDA for the preceding four quarters, and we are required to maintain a minimum EBITDA of $20 million on a rolling four-quarter basis and a minimum level of tangible net worth. This facility may not be sufficient to meet our needs as our business grows, and we may be unable to extend or replace it on acceptable terms, or at all. Any inability by us or our customers to raise the funds necessary to finance our projects, or any inability by us to extend or replace our revolving credit facility, could materially harm our business, financial condition and operating results. Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter. Our operating results are difficult to predict and have historically fluctuated from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company in any period, the trading price of our Class A common stock would likely decline. Table of Contents Factors that may cause our operating results to fluctuate include: our ability to arrange financing for projects; changes in federal, state and local government policies and programs related to, or a reduction in governmental support for, energy efficiency and renewable energy; the timing of work we do on projects where we recognize revenue on a percentage of completion basis; seasonality in construction and in demand for our products and services; a customer s decision to delay our work on, or other risks involved with, a particular project; availability and costs of labor and equipment; the addition of new customers or the loss of existing customers; the size and scale of new customer projects; the availability of bonding for our projects; our ability to control costs, including operating expenses; changes in the mix of our products and services; the rates at which customers renew their O M contracts with us; the length of our sales cycle; the productivity and growth of our sales force; the timing of opening of new offices or making other significant investments in the growth of our business, as the revenue we hope to generate from those expenses often lags several quarters behind those expenses; changes in pricing by us or our competitors, or the need to provide discounts to win business; costs related to the acquisition and integration of companies or assets; general economic trends, including changes in energy efficiency spending or geopolitical events such as war or incidents of terrorism; and future accounting pronouncements and changes in accounting policies. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore such a revenue shortfall could have a disproportionate effect on our operating results for that quarter. We may not be able to maintain or increase our profitability. We have been profitable on an annual basis since the year ended December 31, 2002. However, we have incurred net losses in certain quarters since that time. We may not succeed in maintaining our profitability and could incur quarterly or annual losses in future periods. We intend to increase our expenses as we grow our business and expand into new geographic locations, and we expect to incur additional accounting, legal and other expenses associated with being a public company. If our revenue does not increase sufficiently to offset these increases in costs, our operating results will be harmed. Our historical operating results should not be considered as necessarily indicative of future operating results and we can provide no assurance that we will be able to maintain or increase our profitability in the future. Table of Contents We may not recognize all revenue from our backlog or receive all payments anticipated under awarded projects and customer contracts. As of March 31, 2010, we had backlog of approximately $635 million in future revenue under signed customer contracts for the installation or construction of projects, which we expect to be recognized over the period from 2010 to 2013, and we had been awarded, but not yet signed customer contracts for, projects with estimated total future revenue of an additional $618 million over the same period. As of March 31, 2009, we had backlog of approximately $260 million in future revenue under signed customer contracts for the installation or construction of projects, which we expected to be recognized over the period from 2009 to 2012, and we had been awarded, but not yet signed customer contracts for, projects with estimated total future revenue of an additional $926 million over the period from 2009 to 2013. We also expect to realize recurring revenue both under long-term O M contracts and under long-term energy supply contracts for renewable energy plants that we own. Our customers have the right under some circumstances to terminate contracts or defer the timing of our services and their payments to us. In addition, our government contracts are subject to the risks described below under Provisions in government contracts may harm our business, financial condition and operating results. The payment estimates for projects that have been awarded to us but for which we have not yet signed contracts have been prepared by management and are based upon a number of assumptions, including that the size and scope of the awarded projects will not change prior to the signing of customer contracts, that we or our customers will be able to obtain any necessary third-party financing for the awarded projects, and that we and our customers will reach agreement on and execute contracts for the awarded projects. We are not always able to enter into a contract for an awarded project on the terms proposed. As a result, we may not receive all of the revenue that we include in our backlog or that we estimate we will receive under awarded projects. If we do not receive all of the revenue we currently expect to receive, our future operating results will be adversely affected. In addition, a delay in the receipt of revenue, even if such revenue is eventually received, may cause our operating results for a particular quarter to fall below our expectations. Our business is affected by seasonal trends and construction cycles, and these trends and cycles could have an adverse effect on our operating results. We are subject to seasonal fluctuations and construction cycles, particularly in climates that experience colder weather during the winter months, such as the northern United States and Canada, or at educational institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. In addition, government customers, many of which have fiscal years that do not coincide with ours, typically follow annual procurement cycles and appropriate funds on a fiscal-year basis even though contract performance may take more than one year. Further, government contracting cycles can be affected by the timing of, and delays in, the legislative process related to government programs and incentives that help drive demand for energy efficiency and renewable energy projects. As a result, our revenue and operating income in the third quarter are typically higher, and our revenue and operating income in the first quarter are typically lower, than in other quarters of the year. As a result of such fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful. Our business depends in part on federal, state, provincial and local government support for energy efficiency and renewable energy, and a decline in such support could harm our business. We depend in part on government legislation and policies that support energy efficiency and renewable energy projects and that enhance the economic feasibility of our energy efficiency services and small-scale renewable energy projects. The U.S. and Canadian federal governments and several of the states and provinces in which we operate support our existing and potential customers investments in energy efficiency and renewable energy through legislation and regulations that authorize and regulate the manner in which certain governmental entities do business with us, encourage or subsidize governmental procurement of our services, provide regulatory, tax and other incentives to others to procure our services and provide us with tax and other incentives that reduce our costs or increase our revenue. Table of Contents For example, U.S. legislation authorizing federal agencies to enter into ESPCs, such as those we enter into with our customers, was enacted in 1992. In 2007, three years after the expiration of the original legislation, new ESPC legislation was enacted without an expiration provision, and in the same year, the President of the United States issued an executive order requiring federal agencies to set goals to reduce energy use and increase renewable energy sources and use. In addition, the American Recovery and Reinvestment Act of 2009 allocated $67 billion to promote clean energy, energy efficiency and advanced vehicles. Additionally, the Emergency Economic Stabilization Act of 2008 instituted the 1603 cash grant program, which may provide cash in lieu of an investment tax credit for eligible renewable energy generation sources for which construction commences prior to the end of 2010 where the project is placed in service by various dates set out in the act. The Internal Revenue Code, or the Code, currently provides production tax credits for the generation of electricity from wind projects and from LFG-fueled power projects, and an investment tax credit or grant in lieu of such tax credits for investments in LFG, wind, biomass and solar power generation projects. Various state and local governments have also implemented similar programs and incentives, including legislation authorizing the procurement of ESPCs. We, our customers and prospective customers frequently depend on these programs to help justify the costs associated with, and to finance, energy efficiency and renewable energy projects. If any of these incentives are adversely amended, eliminated or not extended beyond their current expiration dates, or if funding for these incentives is reduced, it could adversely affect our ability to complete projects for existing customers and obtain project commitments from new customers. A delay or failure by government agencies to administer, or make procurements under, these programs in a timely and efficient manner could have a material adverse effect on our existing and potential customers willingness to enter into project commitments with us. In addition, some of our customers purchase electricity, thermal energy or processed LFG from our renewable energy plants, or purchase other energy services from us, because tax, energy and environmental laws encourage or in some cases require these customers to procure power from renewable or low-emission sources, or to reduce their electricity use. Changes to these tax, energy and environmental laws could reduce our customers incentives and mandates to purchase the kinds of services that we supply, and could thereby adversely affect our business, financial condition and operating results. Changes in the laws and regulations governing the public procurement of ESPCs could have a material impact on our business. We derive a significant amount of our revenue from ESPCs with our government customers. While federal, state and local government rules governing such contracts vary, such rules may, for example, permit the funding of such projects through long-term financing arrangements; permit long-term payback periods from the savings realized through such contracts; allow units of government to exclude debt related to such projects from the calculation of their statutory debt limitation; allow for award of contracts on a best value instead of lowest cost basis; and allow for the use of sole source providers. To the extent these rules become more restrictive in the future, our business could be harmed. A significant decline in the fiscal health of federal, state, provincial and local governments could reduce demand for our energy efficiency and renewable energy projects. In 2009, approximately 85% of our revenue was derived from sales to federal, state, provincial or local governmental entities. A significant decline in the fiscal health of these existing and potential customers may make it difficult for them to enter into contracts for our services or to obtain financing necessary to fund such contracts, or may cause them to seek to renegotiate or terminate existing agreements with us. Failure of third parties to manufacture quality products or provide reliable services in a timely manner could cause delays in the delivery of our services and completion of our projects, which could damage our reputation, have a negative impact on our relationships with our customers and adversely affect our growth. Our success depends on our ability to provide services and complete projects in a timely manner, which in part depends on the ability of third parties to provide us with timely and reliable services and Table of Contents products, such as boilers, chillers, cogeneration systems, PV panels, lighting and other complex components. In providing our services and completing our projects, we rely on products that meet our design specifications and components manufactured and supplied by third parties, as well as on services performed by subcontractors. We rely on subcontractors to perform substantially all of the construction and installation work related to our projects. We provide all design and engineering work related to, and act as the general contractor for, our projects. We have established relationships with subcontractors that we believe to be reliable and capable of producing satisfactory results, but we often need to engage subcontractors with whom we have no experience for our projects. If any of our subcontractors are unable to provide services that meet or exceed our customers expectations or satisfy our contractual commitments, our reputation, business and operating results could be harmed. The warranties provided by our third-party suppliers and subcontractors typically limit any direct harm we might experience as a result of our relying on their products and services. However, there can be no assurance that a supplier or subcontractor will be willing or able to fulfill its contractual obligations and make necessary repairs or replace equipment. In addition, these warranties generally expire within one to five years or may be of limited scope or provide limited remedies. If we are unable to avail ourselves of warranty protection, we may incur liability to our customers or additional costs related to the affected products and components, including replacement and installation costs, which could have a material adverse effect on our business, financial condition and operating results. Moreover, any delays, malfunctions, inefficiencies or interruptions in these products or services even if covered by warranties could adversely affect the quality and performance of our solutions. This could cause us to experience difficulty retaining current customers and attracting new customers, and could harm our brand, reputation and growth. In addition, any significant interruption or delay by our suppliers in the manufacture or delivery of products or services on which we depend could require us to expend considerable time, effort and expense to establish alternate sources for such products and services. We may have liability to our customers under our ESPCs if our projects fail to deliver the energy use reductions to which we are committed under the contract. For our energy efficiency projects, we typically enter into ESPCs under which we commit that the projects will satisfy agreed-upon performance standards appropriate to the project. These commitments are typically structured as guarantees of increased energy efficiency that are based on the design, capacity, efficiency or operation of the specific equipment and systems we install. Our commitments generally fall into three categories: pre-agreed, equipment-level and whole building-level. Under a pre-agreed efficiency commitment, our customer reviews the project design in advance and agrees that, upon or shortly after completion of installation of the specified equipment comprising the project, the pre-agreed increase in energy efficiency will have been met. Under an equipment-level commitment, we commit to a level of increased energy efficiency based on the difference in use measured first with the existing equipment and then with the replacement equipment upon completion of installation. A whole building-level commitment requires measurement and verification of increased energy efficiency for a whole building, often based on readings of the utility meter where usage is measured. Depending on the project, the measurement and verification may be required only once, upon installation, based on an analysis of one or more sample installations, or may be required to be repeated at agreed upon intervals generally over periods of up to 20 years. Under our contracts, we typically do not take responsibility for a wide variety of factors outside our control and exclude or adjust for such factors in commitment calculations. These factors include variations in energy prices and utility rates, weather, facility occupancy schedules, the amount of energy-using equipment in a facility, and failure of the customer to operate or maintain the project properly. We rely in part on warranties from our equipment suppliers and subcontractors to back-stop the warranties we provide to our customers and, where appropriate, pass on the warranties to our customers. However, the warranties we provide to our customers are sometimes broader in scope or longer in duration than the corresponding warranties we receive Table of Contents from our suppliers and subcontractors, and we bear the risk for any differences, as well as the risk of warranty default by our suppliers and subcontractors. Typically, our performance commitments apply to the aggregate overall performance of a project rather than to individual energy efficiency measures. Therefore, to the extent an individual measure underperforms, it may be offset by other measures that overperform. In the event that an energy efficiency project does not perform according to the agreed-upon specifications, our agreements typically allow us to satisfy our obligation by adjusting or modifying the installed equipment, installing additional measures to provide substitute energy savings, or paying the customer for lost energy savings based on the assumed conditions specified in the agreement. From our inception to March 31, 2010, our total payments to customers and incurred equipment replacement and maintenance costs under our energy efficiency commitments, after customer acceptance of a project, have been less than $100,000 in the aggregate. However, we may incur additional or increased liabilities or expenses under our ESPCs in the future. Such liabilities or expenses could be substantial, and they could materially harm our business, financial condition or operating results. In addition, any disputes with a customer over the extent to which we bear responsibility to improve performance or make payments to the customer may diminish our prospects for future business from that customer or damage our reputation in the marketplace. We may assume responsibility under customer contracts for factors outside our control, including, in connection with some customer projects, the risk that fuel prices will increase. We typically do not take responsibility under our contracts for a wide variety of factors outside our control. We have, however, in a limited number of contracts assumed some level of risk and responsibility for certain factors sometimes only to the extent that variations exceed specified thresholds and may also do so under certain contracts in the future, particularly in our contracts for renewable energy projects. For example, under a contract for the construction and operation of a cogeneration facility at the U.S. Department of Energy Savannah River Site in South Carolina, a subsidiary of ours is exposed to the risk that the price of the biomass that will be used to fuel the cogeneration facility may rise during the 19-year performance period of the contract. Several provisions in that contract mitigate the price risk, including a specified annual increase in the price our subsidiary charges the customer for biomass fuel, incentives for the customer to make on-site biomass available to the cogeneration facility, an escrow fund from which our subsidiary can withdraw funds should the price of biomass in a given year exceed that charged to the customer, the right to reduce the amount of steam generated by the use of biomass to a stipulated minimum level and the ability to use other fuels, such as used tires, to produce up to 30% of the facility s total production. In addition, although we typically structure our contracts so that our obligation to supply a customer with LFG, electricity or steam, for example, does not exceed the quantity produced by the production facility, in some circumstances we may commit to supply a customer with specified minimum quantities based on our projections of the facility s production capacity. In such circumstances, if we are unable to meet such commitments, we may be required to incur additional costs or face penalties. Despite the steps we have taken to mitigate risks under these and other contracts, such steps may not be sufficient to avoid the need to incur increased costs to satisfy our commitments, and such costs could be material. Increased costs that we are unable to pass through to our customers could have a material adverse effect on our operating results. Our business depends on experienced and skilled personnel and substantial specialty subcontractor resources, and if we lose key personnel or if we are unable to attract and integrate additional skilled personnel, it will be more difficult for us to manage our business and complete projects. The success of our business depends in large part on the skill of our personnel. Accordingly, it is critical that we maintain, and continue to build, a highly experienced management team and specialized workforce, including engineers, project and construction management, and business development and sales professionals. In addition, our construction projects require a significant amount of trade labor resources, such Table of Contents as electricians, mechanics, carpenters, masons and other skilled workers, as well as certain specialty subcontractor skills. Competition for personnel, particularly those with expertise in the energy services and renewable energy industries, is high, and identifying candidates with the appropriate qualifications can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy given our anticipated hiring needs, or we may need to provide higher compensation or more training to our personnel than we currently anticipate. In the event we are unable to attract, hire and retain the requisite personnel and subcontractors, we may experience delays in completing projects in accordance with project schedules and budgets, which may have an adverse effect on our financial results, harm our reputation and cause us to curtail our pursuit of new projects. Further, any increase in demand for personnel and specialty subcontractors may result in higher costs, causing us to exceed the budget on a project, which in turn may have an adverse effect on our business, financial condition and operating results and harm our relationships with our customers. Our future success is particularly dependent on the vision, skills, experience and effort of our senior management team, including our executive officers and our founder, principal stockholder, president and chief executive officer, George P. Sakellaris. If we were to lose the services of any of our executive officers or key employees, our ability to effectively manage our operations and implement our strategy could be harmed and our business may suffer. If we cannot obtain surety bonds and letters of credit, our ability to operate may be restricted. Federal and state laws require us to secure the performance of certain long-term obligations through surety bonds and letters of credit. In addition, we are occasionally required to provide bid bonds or performance bonds to secure our performance under energy efficiency contracts. Our sureties have historically required that George P. Sakellaris, who is our founder, principal stockholder, president and chief executive officer, personally indemnify them for up to an aggregate of $50 million of losses associated with the bonds they have provided on our behalf. We expect this indemnity will terminate following the closing of this offering. In addition, in the event that Mr. Sakellaris no longer controls our company, our sureties may reevaluate our eligibility for surety bonds. Although we expect the net proceeds of this offering to increase our bonding capacity, our ability to obtain required bonds or letters of credit depends in large part upon our capitalization, working capital, past performance, management expertise and reputation, and external factors beyond our control, including the overall capacity of the surety market. Our ability to obtain letters of credit under our existing credit arrangements is limited. We are not permitted to have more than $10 million in letters of credit outstanding at any time (including letters of credit that have been drawn upon but not repaid on our behalf) under the terms of our revolving senior secured credit facility. Moreover, our use of letters of credit limits our borrowing capability under our revolving senior secured credit facility as the aggregate amount of letters of credit we have outstanding at any time reduces our borrowing capacity under the facility by an equal amount. As of March 31, 2010, we had no letters of credit outstanding. In the future, we may have difficulty procuring or maintaining surety bonds or letters of credit, and obtaining them may become more expensive, require us to post cash collateral or otherwise involve unfavorable terms. Because we are sometimes required to have performance bonds or letters of credit in place before projects can commence or continue, our failure to obtain or maintain those bonds and letters of credit would adversely affect our ability to begin and complete projects, and thus could have a material adverse effect on our business, financial condition and operating results. We operate in a highly competitive industry, and our current or future competitors may be able to compete more effectively than we do, which could have a material adverse effect on our business, revenue, growth rates and market share. Our industry is highly competitive, with many companies of varying size and business models, many of which have their own proprietary technologies, competing for the same business as we do. Many of our competitors have longer operating histories and greater resources than us, and could focus their substantial Table of Contents financial resources to develop a competing business model, develop products or services that are more attractive to potential customers than what we offer or convince our potential customers that they should require financing arrangements that would be impractical for smaller companies to offer. Our competitors may also offer energy solutions at prices below cost, devote significant sales forces to competing with us or attempt to recruit our key personnel by increasing compensation, any of which could improve their competitive positions. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete, and reduce our market share and revenue, any of which could have a material adverse effect on our financial condition and operating results. We can provide no assurance that we will continue to effectively compete against our current competitors or additional companies that may enter our markets. In addition, we may also face competition based on technological developments that reduce demand for electricity, increase power supplies through existing infrastructure or that otherwise compete with our products and services. We also encounter competition in the form of potential customers electing to develop solutions or perform services internally rather than engaging an outside provider such as us. We may be unable to complete or operate our projects on a profitable basis or as we have committed to our customers. Development, installation and construction of our energy efficiency and renewable energy projects, and operation of our renewable energy projects, entails many risks, including: failure to receive critical components and equipment that meet our design specifications and can be delivered on schedule; failure to obtain all necessary rights to land access and use; failure to receive quality and timely performance of third-party services; increases in the cost of labor, equipment and commodities needed to construct or operate projects; permitting and other regulatory issues, license revocation and changes in legal requirements; shortages of equipment or skilled labor; unforeseen engineering problems; failure of a customer to accept or pay for renewable energy that we supply; weather interferences, catastrophic events including fires, explosions, earthquakes, droughts and acts of terrorism; and accidents involving personal injury or the loss of life; labor disputes and work stoppages; mishandling of hazardous substances and waste; and other events outside of our control. Any of these factors could give rise to construction delays and construction and other costs in excess of our expectations. This could prevent us from completing construction of our projects, cause defaults under our financing agreements or under contracts that require completion of project construction by a certain time, cause projects to be unprofitable for us, or otherwise impair our business, financial condition and operating results. Our small-scale renewable energy plants may not generate expected levels of output. The small-scale renewable energy plants that we construct and own are subject to various operating risks that may cause them to generate less than expected amounts of processed LFG, electricity or thermal energy. These risks include a failure or degradation of our, our customers or utilities equipment; an inability to find suitable replacement equipment or parts; less than expected supply of the plant s source of renewable Table of Contents energy, such as LFG or biomass; or a faster than expected diminishment of such supply. Any extended interruption in the plant s operation, or failure of the plant for any reason to generate the expected amount of output, could have a material adverse effect on our business and operating results. In addition, we have in the past, and could in the future, incur material asset impairment charges if any of our renewable energy plants incurs operational issues that indicate that our expected future cash flows from the plant are less than its carrying value. Any such impairment charge could have a material adverse effect on our operating results in the period in which the charge is recorded. We may be unable to manage our growth effectively. Our business and operations have expanded rapidly in the last several years, and we anticipate that further expansion of our organization and operations will be required to achieve our expectations for future growth. In addition, in order to manage our expanding operations, we will also need to continue to improve our management, operational and financial controls and our reporting systems and procedures. All of these measures will require significant expenditures and will demand the attention of management. If we do not continue to enhance our management personnel and our operational and financial systems and controls in response to growth in our business, we could experience operating inefficiencies that could impair our competitive position and could increase our costs more than we had planned. If we are unable to manage growth effectively, our business, financial condition and operating results could be adversely affected. We expect that some of our growth will be accomplished through the opening of new offices and the hiring of additional personnel to staff those offices. Even if an office is ultimately successful in generating additional revenue and profit for us, there is generally a lag of several years before we are able to recoup the expenses associated with opening that office. In order to secure contracts for new projects, we typically face a long and variable selling cycle that requires significant resource commitments and requires a long lead time before we realize revenue. The sales, design and construction process for energy efficiency and renewable energy projects typically takes from 12 to 36 months, with sales to federal government and housing authority customers tending to require the longest sales processes. Our existing and potential customers generally have extended budgeting and procurement processes, and sometimes must engage in regulatory approval processes, related to our services. Most of our potential customers issue a request for proposal, or RFP, as part of their consideration of alternatives for their proposed project. In preparation for responding to an RFP, we typically conduct a preliminary audit of the customer s needs and the opportunity to reduce its energy costs. For projects involving a renewable energy plant that is not located on a customer s site or that uses sources of energy not within the customer s control, the sales process also involves the identification of sites with attractive sources of renewable energy, such as a landfill or a site with high winds, and it may involve obtaining necessary rights and governmental permits to develop a project on that site. If we are awarded a project, we then perform a more detailed audit of the customer s facilities, which serves as the basis for the final specifications of the project. We then must negotiate and execute a contract with the customer. In addition, we or the customer typically need to obtain financing for the project. This extended sales process requires the dedication of significant time by our sales and management personnel and our use of significant financial resources, with no certainty of success or recovery of our related expenses. A potential customer may go through the entire sales process and not accept our proposal. All of these factors can contribute to fluctuations in our quarterly financial performance and increase the likelihood that our operating results in a particular quarter will fall below investor expectations. These factors could also adversely affect our business, financial condition and operating results due to increased spending by us that is not offset by increased revenue. Provisions in our government contracts may harm our business, financial condition and operating results. A significant majority of our contract backlog and projects that have been awarded to us but have not yet been committed to signed contracts is attributable to customers that are government entities. Our contracts with the federal government and its agencies, and with state, provincial and local governments, customarily Table of Contents contain provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to: terminate existing contracts, in whole or in part, for any reason or no reason; reduce or modify contracts or subcontracts; decline to award future contracts if actual or apparent organizational conflicts of interest are discovered, or to impose organizational conflict mitigation measures as a condition of eligibility for an award; suspend or debar the contractor from doing business with the government or a specific government agency; and pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions unique to government contracting. Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the government s convenience. Under general principles of government contracting law, if the government terminates a contract for convenience, the terminated company may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, the defaulting company is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. In most of our contracts with the federal government, the government has agreed to make a payment to us in the event that it terminates the agreement early. The termination payment is designed to compensate us for the cost of construction plus financing costs and profit on the work completed. In ESPCs for governmental entities, the methodologies for computing energy savings may be less favorable than for non-governmental customers and may be modified during the contract period. We may be liable for price reductions if the projected savings cannot be substantiated. In addition to the right of the federal government to terminate its contracts with us, federal government contracts are conditioned upon the continuing approval by Congress of the necessary spending to honor such contracts. Congress often appropriates funds for a program on a September 30 fiscal-year basis even though contract performance may take more than one year. Consequently, at the beginning of many major governmental programs, contracts often may not be fully funded, and additional monies are then committed to the contract only if, as and when appropriations are made by Congress for future fiscal years. Similar practices are likely to also affect the availability of funding for our contracts with Canadian, as well as state, provincial and local, government entities. If one or more of our government contracts were terminated or reduced, or if appropriations for the funding of one or more of our contracts is delayed or terminated, our business, financial condition and operating results could be adversely affected. Government contracts normally contain additional terms and conditions that may increase our costs of doing business, reduce our profits and expose us to liability for failure to comply with these terms and conditions. These include, for example: specialized accounting systems unique to government contracting, which may include mandatory compliance with federal Cost Accounting Standards; mandatory financial audits and potential liability for adjustments in contract prices; public disclosure of contracts, which may include pricing information; mandatory socioeconomic compliance requirements, including small business promotion, labor, environmental and U.S. manufacturing requirements; and requirements for maintaining current facility and/or personnel security clearances to access certain government facilities or to maintain certain records, and related industrial security compliance requirements. Table of Contents Our contracts with Canadian governmental entities frequently involve similar risks. Any failure by us to comply with these governmental requirements could adversely affect our business. Our renewable energy projects, particularly our LFG projects, depend on locating and acquiring suitable operating sites, of which there are a limited number. Our small-scale renewable energy projects must be situated at sites that have access to renewable sources of energy. Specifically, LFG projects must originate on or near landfill sites, of which approximately 500 are currently available in the United States for economically viable LFG projects. Sites for our renewable energy plants must be suitable for construction and efficient operation, which, among other things, requires appropriate road access. Further, many plants must be interconnected to electricity transmission or distribution networks. Once we have identified a suitable operating site, obtaining the requisite LFG and/or land rights (including access rights, setbacks and other easements) requires us to negotiate with landowners and local government officials. These negotiations can take place over a long time, are not always successful and sometimes require economic concessions not in our original plans. The property rights necessary to construct and interconnect our plants must also be insurable and otherwise satisfactory to our financing counterparties. In addition, our ability to obtain adequate LFG and/or property rights is subject to competition. If a competitor or other party obtains LFG and/or land rights critical to our project development efforts and we are unable to reach agreement for their use, we could incur losses as a result of development costs for sites we do not develop, which we would have to write off. If we are unable to obtain adequate LFG and/or property or other rights for a renewable energy plant, including its interconnection, that plant may be smaller in size or potentially unfeasible. Failure to obtain insurable property rights for a project satisfactory to our financing sources would preclude our ability to obtain third-party financing and could prevent ongoing development and construction of that project. We plan to expand our business in part through future acquisitions, but we may not be able to identify or complete suitable acquisitions. Historically, acquisitions have been a significant part of our growth strategy. We plan to continue to use acquisitions of companies or assets to expand our project skill-sets and capabilities, expand our geographic markets, add experienced management and increase our product and service offerings. However, we may be unable to implement this growth strategy if we cannot identify suitable acquisition candidates, reach agreement with acquisition targets on acceptable terms or arrange required financing for acquisitions on acceptable terms. In addition, the time and effort involved in attempting to identify acquisition candidates and consummate acquisitions may divert members of our management from the operations of our company. Any future acquisitions that we may make could disrupt our business, cause dilution to our stockholders and harm our business, financial condition or operating results. If we are successful in consummating acquisitions, those acquisitions could subject us to a number of risks, including: the purchase price we pay could significantly deplete our cash reserves or result in dilution to our existing stockholders; we may find that the acquired company or assets do not improve our customer offerings or market position as planned; we may have difficulty integrating the operations and personnel of the acquired company; key personnel and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition; we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting; Table of Contents we may assume or be held liable for risks and liabilities (including for environmental-related costs) as a result of our acquisitions, some of which we may not discover during our due diligence or adequately adjust for in our acquisition arrangements; our ongoing business and management s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; we may incur one-time write-offs or restructuring charges in connection with the acquisition; we may acquire goodwill and other intangible assets that are subject to amortization or impairment tests, which could result in future charges to earnings; and we may not be able to realize the cost savings or other financial benefits we anticipated. These factors could have a material adverse effect on our business, financial condition and operating results. We need governmental approvals and permits, and we typically must meet specified qualifications, in order to undertake our energy efficiency projects and construct, own and operate our small-scale renewable energy projects, and any failure to do so would harm our business. The design, construction and operation of our energy efficiency and small-scale renewable energy projects require various governmental approvals and permits, and may be subject to the imposition of related conditions that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal. We cannot predict whether all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit essential to a project or the imposition of impractical conditions would impair our ability to develop the project. In addition, we cannot predict whether the permits will attract significant opposition or whether the permitting process will be lengthened due to complexities and appeals. Delay in the review and permitting process for a project can impair or delay our ability to develop that project or increase the cost so substantially that the project is no longer attractive to us. We have experienced delays in developing our projects due to delays in obtaining permits and may experience delays in the future. If we were to commence construction in anticipation of obtaining the final, non-appealable permits needed for that project, we would be subject to the risk of being unable to complete the project if all the permits were not obtained. If this were to occur, we would likely lose a significant portion of our investment in the project and could incur a loss as a result. Further, the continued operations of our projects require continuous compliance with permit conditions. This compliance may require capital improvements or result in reduced operations. Any failure to procure, maintain and comply with necessary permits would adversely affect ongoing development, construction and continuing operation of our projects. In addition, the projects we perform for governmental agencies are governed by particular qualification and contracting regimes. Certain states require qualification with an appropriate state agency as a precondition to performing work or appearing as a qualified energy service provider for state, county and local agencies within the state. For example, the Commonwealth of Massachusetts and the states of Colorado and Washington pre-qualify energy service providers and provide contract documents that serve as the starting point for negotiations with potential governmental clients. Most of the work that we perform for the federal government is performed under IDIQ agreements between a government agency and us or a subsidiary. These IDIQ agreements allow us to contract with the relevant agencies to implement energy projects, but no work may be performed unless we and the agency agree on a task order or delivery order governing the provision of a specific project. The government agencies enter into contracts for specific projects on a competitive basis. We and our subsidiaries and affiliates are currently party to an IDIQ agreement with the U.S. Department of Energy that expires in 2019. If we are unable to maintain or renew our IDIQ qualification under the U.S. Department of Energy program for ESPCs, or similar federal or state qualification regimes, our business could be materially harmed. Table of Contents Many of our small-scale renewable energy projects are, and other future projects may be, subject to or affected by U.S. federal energy regulation or other regulations that govern the operation, ownership and sale of the facility, or the sale of electricity from the facility. The Public Utility Holding Company Act of 2005, or PUHCA, and the Federal Power Act, or FPA, regulate public utility holding companies and their subsidiaries and place constraints on the conduct of their business. The FPA regulates wholesale sales of electricity and the transmission of electricity in interstate commerce by public utilities. Under the Public Utility Regulatory Policies Act of 1978, or PURPA, all of our current small-scale renewable energy projects are small power qualifying facilities (facilities meeting statutory size, fuel and ownership requirements) that are exempt from regulations under PUHCA, most provisions of the FPA and state rate regulation. None of our renewable energy projects are currently subject to rate regulation for wholesale power sales by the Federal Energy Regulatory Commission, or FERC, under the FPA, but certain of our projects that are under construction or development could become subject to such regulation in the future. Also, we may acquire interests in or develop generating projects that are not qualifying facilities. Non-qualifying facility projects would be fully subject to FERC corporate and rate regulation, and would be required to obtain FERC acceptance of their rate schedules for wholesale sales of energy, capacity and ancillary services, which requires substantial disclosures to and discretionary approvals from FERC. FERC may revoke or revise an entity s authorization to make wholesale sales at negotiated, or market-based, rates if FERC determines that we can exercise market power in transmission or generation, create barriers to entry or engage in abusive affiliate transactions or market manipulation. In addition, many public utilities (including any non-qualifying facility generator in which we may invest) are subject to FERC reporting requirements that impose administrative burdens and that, if violated, can expose the company to civil penalties or other risks. All of our wholesale electric power sales are subject to certain market behavior rules. These rules change from time to time, by virtue of FERC rulemaking proceedings and FERC-ordered amendments to utilities FERC tariffs. If we are deemed to have violated these rules, we will be subject to potential disgorgement of profits associated with the violation and/or suspension or revocation of our market-based rate authority, as well as potential criminal and civil penalties. If we were to lose market-based rate authority for any non-qualifying facility project we may acquire or develop in the future, we would be required to obtain FERC s acceptance of a cost-based rate schedule and could become subject to, among other things, the burdensome accounting, record keeping and reporting requirements that are imposed on public utilities with cost-based rate schedules. This could have an adverse effect on the rates we charge for power from our projects and our cost of regulatory compliance. Wholesale electric power sales are subject to increasing regulation. The terms and conditions for power sales, and the right to enter and remain in the wholesale electric sector, are subject to FERC oversight. Due to major regulatory restructuring initiatives at the federal and state levels, the U.S. electric industry has undergone substantial changes over the past decade. We cannot predict the future design of wholesale power markets or the ultimate effect ongoing regulatory changes will have on our business. Other proposals to further regulate the sector may be made and legislative or other attention to the electric power market restructuring process may delay or reverse the movement towards competitive markets. If we become subject to additional regulation under PUHCA, FPA or other regulatory frameworks, if existing regulatory requirements become more onerous, or if other material changes to the regulation of the electric power markets take place, our business, financial condition and operating results could be adversely affected. Compliance with environmental laws could adversely affect our operating results. Costs of compliance with federal, state, provincial, local and other foreign existing and future environmental regulations could adversely affect our cash flow and profitability. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental permits in connection with energy efficiency and renewable energy projects, and we may incur significant additional costs to comply with these requirements. If we fail to comply with these requirements, we could be subject to Table of Contents civil or criminal liability, damages and fines. Existing environmental regulations could be revised or reinterpreted and new laws and regulations could be adopted or become applicable to us or our projects, and future changes in environmental laws and regulations could occur. These factors may materially increase the amount we must invest to bring our projects into compliance and impose additional expense on our operations. In addition, private lawsuits or enforcement actions by federal, state, provincial and/or foreign regulatory agencies may materially increase our costs. Certain environmental laws make us potentially liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability is not limited to the cleanup of contamination we actually caused. Although we seek to obtain indemnities against liabilities relating to historical contamination at the facilities we own or operate, we cannot provide any assurance that we will not incur liability relating to the remediation of contamination, including contamination we did not cause. For example, in 2009, a customer for which we were performing an energy efficiency project initiated a legal proceeding against us as a result of project delays that we believe were attributable to the discovery of hazardous materials and need for remediation by the customer. An adverse outcome in this proceeding could have an adverse effect on our operating results in the period in which the outcome is determined. We may not be able to obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required environmental regulatory approvals or failure to obtain and comply with them could adversely affect our business and operating results. International expansion is one of our growth strategies, and international operations will expose us to additional risks that we do not face in the United States, which could have an adverse effect on our operating results. We generate a significant portion of our revenue from operations in Canada, and although we are engaged in overseas projects for the U.S. Department of Defense, we currently derive a small amount of revenue from outside of North America. However, international expansion is one of our growth strategies, and we expect our revenue and operations outside of North America will expand in the future. These operations will be subject to a variety of risks that we do not face in the United States, and that we may face only to a limited degree in Canada, including: building and managing highly experienced foreign workforces and overseeing and ensuring the performance of foreign subcontractors; increased travel, infrastructure and legal and compliance costs associated with multiple international locations; additional withholding taxes or other taxes on our foreign income, and tariffs or other restrictions on foreign trade or investment; imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, many of which differ from those in the United States; increased exposure to foreign currency exchange rate risk; longer payment cycles for sales in some foreign countries and potential difficulties in enforcing contracts and collecting accounts receivable; difficulties in repatriating overseas earnings; general economic conditions in the countries in which we operate; and political unrest, war, incidents of terrorism, or responses to such events. Our overall success in international markets will depend, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we Table of Contents do business. Our failure to manage these risks successfully could harm our international operations, reduce our international sales and increase our costs, thus adversely affecting our business, financial condition and operating results. Our insurance and contractual protections may not always cover lost revenue, increased expenses or liquidated damages payments. Although we maintain insurance, obtain warranties from suppliers, obligate subcontractors to meet certain performance levels and attempt, where feasible, to pass risks we cannot control to our customers, the proceeds of such insurance, warranties, performance guarantees or risk sharing arrangements may not be adequate to cover lost revenue, increased expenses or liquidated damages payments that may be required in the future. If the cost of energy generated by traditional sources does not increase, or if it decreases, demand for our services may decline. Decreases in the costs associated with traditional sources of energy, such as prices for commodities like coal, oil and natural gas, may reduce demand for energy efficiency and renewable energy solutions. Technological progress in traditional forms of electricity generation or the discovery of large new deposits of traditional fuels could reduce the cost of electricity generated from those sources and as a consequence reduce the demand for our solutions. Any of these developments could have a material adverse effect on our business, financial condition and operating results. We have a material weakness in our internal control over financial reporting. If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors and customers views of us. As a public company, we will become subject to a set of laws and regulations requiring that we establish and maintain internal control over financial reporting. Internal control over financial reporting is defined under Securities and Exchange Commission, or SEC, rules as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. We have not yet begun the process of documenting, reviewing and, as appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually becoming subject to the SEC rules concerning internal control over financial reporting, which take effect beginning with the filing of our second Annual Report on Form 10-K (which will be due in March 2012). Establishing and maintaining adequate internal financial and accounting controls and procedures so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently, and may distract our officers and employees from the operation of our business. We do not currently have personnel with an appropriate level of knowledge, experience or training in the selection, application and implementation of GAAP as it relates to certain complex accounting issues, income taxes and SEC financial reporting requirements. This constitutes a material weakness in our internal control over financial reporting that could result in material misstatements in our financial statements not being prevented or detected. Although we plan to remediate this material weakness by hiring additional personnel with the requisite expertise, we may experience difficulties or delays in doing so, and new employees will require time and training to learn our business and operating processes and procedures. If we fail to enhance and then maintain our internal control over financial reporting, we may be unable to report our financial results timely and accurately, and we may be less likely to prevent fraud. In addition, such failure could increase our operating costs, materially impair our ability to operate our business, result in SEC investigations and penalties and lead to the delisting of our common stock from the . The resulting damage to our reputation in the marketplace and our financial credibility could significantly Table of Contents impair our sales and marketing efforts with customers. Further, investors perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements could adversely affect the market price of our Class A common stock. Changes in utility regulation and tariffs could adversely affect our business. Our business is affected by regulations and tariffs that govern the activities of utilities. For example, utility companies are commonly allowed by regulatory authorities to charge fees to larger industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to our customers of taking advantage of our services and make them less desirable, thereby harming our business, financial condition and operating results. Our current generating projects are all operated as qualifying facilities. FERC regulations under the FPA confer upon these facilities key rights to interconnection with local utilities, and can entitle qualifying facilities to enter into power purchase agreements with local utilities, from which the qualifying facilities benefit. Changes to these federal laws and regulations could increase our regulatory burdens and costs, and could reduce our revenue. In addition, modifications to the pricing policies of utilities could require renewable energy systems to achieve lower prices in order to compete with the price of electricity from the electric grid and may reduce the economic attractiveness of certain energy efficiency measures. Some of the demand-reduction services we provide for utilities and institutional clients are subject to regulatory tariffs imposed under federal and state utility laws. In addition, the operation of, and electrical interconnection for, our renewable energy projects are subject to federal, state or provincial interconnection and federal reliability standards that are also set forth in utility tariffs. These tariffs specify rules, business practices and economic terms to which we are subject. The tariffs are drafted by the utilities and approved by the utilities state and federal regulatory commissions. These tariffs change frequently and it is possible that future changes will increase our administrative burden or adversely affect the terms and conditions under which we render service to our customers. Our activities and operations are subject to numerous health and safety laws and regulations, and if we violate such regulations, we could face penalties and fines. We are subject to numerous health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations require us to obtain and maintain permits and approvals and implement health and safety programs and procedures to control risks associated with our projects. Compliance with those laws and regulations can require us to incur substantial costs. Moreover, if our compliance programs are not successful, we could be subject to penalties or to revocation of our permits, which may require us to curtail or cease operations of the affected projects. Violations of laws, regulations and permit requirements may also result in criminal sanctions or injunctions. Health and safety laws, regulations and permit requirements may change or become more stringent. Any such changes could require us to incur materially higher costs than we currently have. Our costs of complying with current and future health and safety laws, regulations and permit requirements, and any liabilities, fines or other sanctions resulting from violations of them, could adversely affect our business, financial condition and operating results. Our credit facilities and debt instruments contain financial and operating restrictions that may limit our business activities and our access to credit. Provisions in our credit facilities and debt instruments impose restrictions on our and certain of our subsidiaries ability to, among other things: incur additional debt, or debt related to federal projects in excess of specified limits; pay cash dividends and make distributions; make certain investments and acquisitions; Table of Contents guarantee the indebtedness of others or our subsidiaries; redeem or repurchase capital stock; create liens; enter into transactions with affiliates; engage in new lines of business; sell, lease or transfer certain parts of our business or property; enter into sale-leaseback arrangements; and merge or consolidate. These agreements also contain other customary covenants, including covenants that require us to meet specified financial ratios and financial tests. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and cause us to be unable to borrow under our credit facilities and debt instruments. In addition to preventing additional borrowings under these agreements, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under these agreements, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us or at all. If our subsidiaries default on their obligations under their debt instruments, we may need to make payments to lenders to prevent foreclosure on the collateral securing the debt. We typically set up subsidiaries to own and finance our renewable energy projects. These subsidiaries incur various types of debt which can be used to finance one or more projects. This debt is typically structured as non-recourse debt, which means it is repayable solely from the revenue from the projects financed by the debt and is secured by such projects physical assets, major contracts and cash accounts and a pledge of our equity interests in the subsidiaries involved in the projects. Although our subsidiary debt is typically non-recourse to Ameresco, if a subsidiary of ours defaults on such obligations, or if one project out of several financed by a particular subsidiary s indebtedness encounters difficulties or is terminated, then we may from time to time determine to provide financial support to the subsidiary in order to maintain rights to the project or otherwise avoid the adverse consequences of a default. In the event a subsidiary defaults on its indebtedness, its creditors may foreclose on the collateral securing the indebtedness, which may result in our losing our ownership interest in some or all of the subsidiary s assets. The loss of our ownership interest in a subsidiary or some or all of a subsidiary s assets could have a material adverse effect on our business, financial condition and operating results. We are exposed to the credit risk of some of our customers. Most of our revenue is derived under multi-year or long-term contracts with our customers, and our revenue is therefore dependent to a large extent on the creditworthiness of our customers. During periods of economic downturn in the global economy, our exposure to credit risks from our customers increases, and our efforts to monitor and mitigate the associated risks may not be effective in reducing our credit risks. In the event of non-payment by one or more of our customers, our business, financial condition and operating results could be adversely affected. Table of Contents The use and enjoyment of real property rights for our small-scale renewable energy projects may be adversely affected by the rights of lienholders and leaseholders that are superior to those of the grantors of those real property rights to us. Our small-scale renewable energy projects generally are, and are likely to continue to be, located on land we or our customers occupy pursuant to long-term easements and leases. The ownership interests in the land subject to these easements and leases may be subject to mortgages securing loans or other liens (such as tax liens) and other easement and lease rights of third parties (such as leases of oil or mineral rights) that were created prior to our or our customers easements and leases. As a result, the rights under these easements or leases may be subject, and subordinate, to the rights of those third parties. We typically perform title searches and obtain title insurance to protect ourselves or our customers against these risks. Such measures may, however, be inadequate to protect against all risk of loss of rights to use the land on which these projects are located, which could have a material adverse effect on our business, financial condition and operating results. Fluctuations in foreign currency exchange rates can impact our results. A significant portion of our total revenue is generated by our Canadian subsidiary, Ameresco Canada. Changes in exchange rates between the Canadian dollar and the U.S. dollar may adversely affect our operating results. The trading price of our Class A common stock is likely to be volatile, and you may not be able to sell your shares at or above the initial public offering price. Our Class A common stock has no prior trading history. The initial public offering price for our Class A common stock will be determined through negotiations between us and the representatives of the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following this offering. In addition, the trading price of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors. In addition to the risks described in this section, factors that may cause the market price of our Class A common stock to fluctuate include: fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; changes in estimates of our future financial results or recommendations by securities analysts; investors general perception of us; and changes in general economic, industry and market conditions. In addition, if the stock market in general experiences a significant decline, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition or operating results. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management s attention and resources. This could have a material adverse effect on our business, operating results and financial condition. Our securities have no prior market and an active public trading market for our Class A common stock may not develop. Prior to this offering, there has been no public market for shares of our Class A common stock. Although our Class A common stock has been approved for listing on the New York Stock Exchange, or NYSE, an active public trading market for our Class A common stock may not develop or, if it develops, may not be maintained after this offering. For example, applicable NYSE rules impose certain securities trading requirements, including minimum trading price, minimum number of stockholders and minimum market capitalization. If an active public trading market for our Class A common stock does not develop or is not Table of Contents sustained, it may be difficult for you to sell your shares of our Class A common stock at an attractive price or at all. Holders of our Class A common stock, which is the stock we are selling in this offering, are entitled to one vote per share, and holders of our Class B common stock are entitled to five votes per share. The lower voting power of our Class A common stock may negatively affect the attractiveness of our Class A common stock to investors and, as a result, its market value. We have two classes of common stock: Class A common stock, which is the stock we are selling in this offering and which is entitled to one vote per share, and Class B common stock, which is entitled to five votes per share. The difference in the voting power of our Class A and Class B common stock could diminish the market value of our Class A common stock because of the superior voting rights of our Class B common stock and the power those rights confer. For the foreseeable future, Mr. Sakellaris or his affiliates will be able to control the selection of all members of our board of directors, as well as virtually every other matter that requires stockholder approval, which will severely limit the ability of other stockholders to influence corporate matters. Except in certain limited circumstances required by applicable law, holders of Class A and Class B common stock vote together as a single class on all matters to be voted on by our stockholders. Immediately following the closing of this offering, Mr. Sakellaris, our founder, principal stockholder, president and chief executive officer will own all of our Class B common stock, which, together with his Class A common stock, will represent 82.9% of the combined voting power of our outstanding Class A and Class B common stock. Under our restated certificate of incorporation, holders of shares of Class B common stock may generally transfer those shares to family members, including spouses and descendents or the spouses of such descendents, as well as to affiliated entities, without having the shares automatically convert into shares of Class A common stock. Therefore, Mr. Sakellaris, his affiliates, and his family members and descendents will, for the foreseeable future, be able to control the outcome of the voting on virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as an acquisition of our company, even if they come to own, in the aggregate, as little as 20% of the economic interest of the outstanding shares of our Class A and Class B common stock. Moreover, these persons may take actions in their own interests that you or our other stockholders do not view as beneficial. See Principal and Selling Stockholders and Description of Capital Stock. Future sales of shares by existing stockholders could cause our stock price to decline. Once a trading market develops for our Class A common stock, many of our stockholders for the first time will have an opportunity to sell their shares, subject to the contractual lock-up agreements and other restrictions on resale discussed in this prospectus. Sales by our existing stockholders of a substantial number of shares in the public market, or the threat that substantial sales might occur, could cause the market price of the Class A common stock to decrease significantly. These factors could also make it difficult for us to raise additional capital by selling our Class A common stock. See Shares Eligible for Future Sale for further details regarding the number of shares eligible for sale in the public market after this offering. If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. The trading market for our Class A common stock will depend in part on any research reports that securities or industry analysts publish about us or our business. After this offering, if no securities or industry analysts initiate coverage of our company, the trading price for our Class A common stock may be negatively impacted. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish unfavorable reports about our business, our stock price would likely decline. In addition, if any securities or industry analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which could cause our stock price and trading volume to decline. Table of Contents You will experience substantial dilution as a result of this offering and future equity issuances. The initial public offering price per share of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A common stock. As a result, investors purchasing Class A common stock in this offering will experience immediate dilution of $10.77 per share, at an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus. In addition, we have granted options to acquire Class A common stock at prices significantly below the initial public offering price. To the extent outstanding options are exercised, there will be further dilution to investors in this offering. See Dilution. Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment. We expect to use a portion of the net proceeds to us from this offering to repay the balance outstanding under our $50 million revolving senior secured credit facility, under which $24.9 million in principal was outstanding at of March 31, 2010 and $31.4 million in principal was outstanding as of June 30, 2010, and the entire principal balance of and all accrued and unpaid interest on the $3.0 million subordinated note held by Mr. Sakellaris, our founder, principal stockholder, president and chief executive officer. We intend to use the balance of the net proceeds for working capital and other general corporate purposes, which may include opening additional offices in the United States and abroad, expanding sales and marketing activities, funding the development and construction of our small-scale renewable energy projects and other capital expenditures. Our management will have broad discretion over the use of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of those net proceeds. Although it is the intention of our management to use the net proceeds from the offering in the best interests of the company, our management might not apply the net proceeds from this offering in ways that increase the value of your investment or in ways with which you agree. See Use of Proceeds. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We have never declared or paid any cash dividends on our capital stock and do not currently expect to pay any cash dividends for the foreseeable future. Our revolving senior secured credit facility with Bank of America limits our ability to declare and pay cash dividends during the term of that agreement. See Dividend Policy. We intend to use our future earnings, if any, in the operation and expansion of our business. Accordingly, you are not likely to receive any dividends on your Class A common stock for the foreseeable future, and your ability to achieve a return on your investment will therefore depend on appreciation in the market price of our Class A common stock. Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our Class A common stock. We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent an acquisition of our company by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be supported by our existing stockholders. In addition, our restated certificate of incorporation and by-laws may discourage, delay or prevent an acquisition or a change in our management that stockholders may consider favorable. Our restated certificate of incorporation and by-laws, which will be in effect upon the closing of this offering: provide for a dual class capital structure that allows our founder, principal stockholder, president and chief executive officer, Mr. Sakellaris, to control the outcome of the voting on virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as an acquisition of our company; authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt; Table of Contents establish a classified board of directors, as a result of which only approximately one-third of our directors are presented to a stockholder vote for re-election at any annual meeting of stockholders; provide that directors may be removed from office only for cause and only upon a supermajority stockholder vote; provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office; do not permit stockholders to call special meetings of stockholders; prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and require a supermajority stockholder vote to effect certain amendments to our restated certificate of incorporation and by-laws. For additional information regarding these and other anti-takeover provisions, see Description of Capital Stock Anti-Takeover Effects of Delaware Law and Our Restated Certificate of Incorporation and By-Laws. Table of Contents

parsed_sections/risk_factors/2010/BAH_booz_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below. Risks Related to Our Business We depend on contracts with U.S. government agencies for substantially all of our revenue. If our relationships with such agencies are harmed, our future revenue and operating profits would decline. The U.S. government is our primary client, with revenue from contracts and task orders, either as a prime or a subcontractor, with U.S. government agencies accounting for 98% of our revenue for fiscal 2010. Our belief is that the successful future growth of our business will continue to depend primarily on our ability to be awarded work under U.S. government contracts, as we expect this will be the primary source of all of our revenue in the foreseeable future. For this reason, any issue that compromises our relationship with the U.S. government generally or any U.S. government agency that we serve would cause our revenue to decline. Among the key factors in maintaining our relationship with U.S. government agencies are our performance on contracts and task orders, the strength of our professional reputation, compliance with applicable laws and regulations, and the strength of our relationships with client personnel. In addition, the mishandling or the perception of mishandling of sensitive information, such as our failure to maintain the confidentiality of the existence of our business relationships with certain of our clients, could harm our relationship with U.S. government agencies. If a client is not satisfied with the quality or type of work performed by us, a subcontractor or other third parties who provide services or products for a specific project, clients might seek to terminate the contract prior to its scheduled expiration date, provide a negative assessment of our performance to government-maintained contractor past-performance data repositories, fail to award us additional business under existing contracts or otherwise and direct future business to our competitors. Furthermore, we may incur additional costs to address any such situation and the profitability of that work might be impaired. To the extent that our performance does not meet client expectations, or our reputation or relationships with any of our clients is impaired, our revenue and operating profits could materially decline. U.S. government spending and mission priorities could change in a manner that adversely affects our future revenue and limits our growth prospects. Our business depends upon continued U.S. government expenditures on defense, intelligence and civil programs for which we provide support. These expenditures have not remained constant over time and have been reduced in certain periods. Our business, prospects, financial condition or operating results could be materially harmed among other causes by the following: budgetary constraints affecting U.S. government spending generally, or specific agencies in particular, and changes in available funding; a shift in expenditures away from agencies or programs that we support; reduced U.S. government outsourcing of functions that we are currently contracted to provide, including as a result of increased insourcing; changes in U.S. government programs that we support or related requirements; U.S. government shutdowns (such as that which occurred during government fiscal year 1996) or weather-related closures in the Washington, DC area (such as that which occurred in February 2010) and other potential delays in the appropriations process; U.S. government agencies awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures; delays in the payment of our invoices by government payment offices; and changes in the political climate and general economic conditions, including a slowdown of the economy or unstable economic conditions and responses to conditions, such as emergency spending, that reduce funds available for other government priorities. The Department of Defense is one of our significant clients and cost cutting, including through consolidation and elimination of duplicative organizations and insourcing, has become a major initiative for the Department of Defense. In particular, the Secretary of Defense recently announced that he has directed the Department of Defense to reduce funding for service support contractors by 10% per year for the next three years. A reduction in the amount of services that we are contracted to provide to the Department of Defense as a result of any of these related initiatives or otherwise could have a material adverse effect on our business and results of operations. These or other factors could cause our defense, intelligence or civil clients to decrease the number of new contracts awarded generally and fail to award us new contracts, reduce their purchases under our existing contracts, exercise their right to terminate our contracts, or not exercise options to renew our contracts, any of which could cause a material decline in our revenue. We are required to comply with numerous laws and regulations, some of which are highly complex, and our failure to comply could result in fines or civil or criminal penalties or suspension or debarment by the U.S. government that could result in our inability to continue to work on or receive U.S. government contracts, which could materially and adversely affect our results of operations. As a U.S. government contractor, we must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts, which affect how we do business with our clients. Such laws and regulations may potentially impose added costs on our business and our failure to comply with them may lead to civil or criminal penalties, termination of our U.S. government contracts and/or suspension or debarment from contracting with federal agencies. Some significant laws and regulations that affect us include: the Federal Acquisition Regulation, or the FAR, and agency regulations supplemental to the FAR, which regulate the formation, administration and performance of U.S. government contracts. Specifically, FAR 52.203-13 requires contractors to establish a Code of Business Ethics and Conduct, implement a comprehensive internal control system, and report to the government when the contractor has credible evidence that a principal, employee, agent, or subcontractor, in connection with a government contract, has violated certain federal criminal law, violated the civil False Claims Act or has received a significant overpayment; the False Claims Act and False Statements Act, which impose civil and criminal liability for presenting false or fraudulent claims for payments or reimbursement, and making false statements to the U.S. government, respectively; the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with the negotiation of a contract, modification or task order; laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data, including requirements regarding any applicable licensing of our employees involved in such work; and the Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts and require consistency of accounting practices over time. In addition, the U.S. government adopts new laws, rules and regulations from time to time that could have a material impact on our results of operations. Our performance under our U.S. government contracts and our compliance with the terms of those contracts and applicable laws and regulations are subject to periodic audit, review and investigation by various agencies of the U.S. government, and the current environment has led to increased regulatory scrutiny and sanctions for non-compliance by such agencies generally. In addition, from time to time we report potential or actual violations of applicable laws and regulations to the relevant governmental authority. Any such report of a potential or actual violation of applicable laws or regulations could lead to an audit, review or investigation by the relevant agencies of the U.S. government. If such an audit, review or investigation uncovers a violation of a law or regulation, or improper or illegal activities relating to our U.S. government contracts, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and suspension or debarment from contracting with U.S. government agencies. Such penalties and sanctions are not uncommon in the industry and there is inherent uncertainty as to the outcome of any particular audit, review or investigation. If we incur a material penalty or administrative sanction or otherwise suffer harm to our reputation, our profitability, cash position and future prospects could be materially and adversely affected. Further, if the U.S. government were to initiate suspension or debarment proceedings against us or if we are indicted for or convicted of illegal activities relating to our U.S. government contracts following an audit, review or investigation, we may lose our ability to be awarded contracts in the future or receive renewals of existing contracts for a period of time which could materially and adversely affect our results of operations or financial condition. We could also suffer harm to our reputation if allegations of impropriety were made against us, which would impair our ability to win awards of contracts in the future or receive renewals of existing contracts. We derive a majority of our revenue from contracts awarded through a competitive bidding process, and our revenue and profitability may be adversely affected if we are unable to compete effectively in the process or if there are delays caused by our competitors protesting major contract awards received by us. We derive a majority of our revenue from U.S. government contracts awarded though competitive bidding processes. We do not expect this to change for the foreseeable future. Our failure to compete effectively in this procurement environment would have a material adverse effect on our revenue and profitability. The competitive bidding process involves risk and significant costs to businesses operating in this environment, including: the necessity to expend resources, make financial commitments (such as procuring leased premises) and bid on engagements in advance of the completion of their design, which may result in unforeseen difficulties in execution, cost overruns and, in the case of an unsuccessful competition, the loss of committed costs; the substantial cost and managerial time and effort spent to prepare bids and proposals for contracts that may not be awarded to us; the ability to accurately estimate the resources and costs that will be required to service any contract we are awarded; the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract; and any opportunity cost of bidding and winning other contracts we might otherwise pursue. In circumstances where contracts are held by other companies and are scheduled to expire, we still may not be provided the opportunity to bid on those contracts if the U.S. government determines to extend the existing contract. If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for the duration of those contracts to the extent that there is no additional demand for such services. An inability to consistently win new contract awards over any extended period would have a material adverse effect on our business and results of operations. It can take many months for the relevant U.S. government agency to resolve protests by one or more of our competitors of contract awards we receive. The resulting delay in the start up and funding of the work under these contracts may cause our actual results to differ materially and adversely from those anticipated. We may lose GSA schedules or our position as a prime contractor on one or more of our GWACs. We believe that one of the key elements of our success is our position as the holder of ten General Services Administration Multiple Award schedule contracts, or GSA schedules, and as a prime contractor under four government-wide acquisition contract vehicles, or GWACs, as of September 30, 2010. GSA schedules are administered by the General Services Administration and support a wide range of products and services. GWACs are used to procure IT products and services and are administered by the agency soliciting the services or products. Our ability to maintain our existing business and win new business depends on our ability to maintain our position as a GSA schedule contractor and a prime contractor on GWACs. The loss of any of our GSA schedules or our prime contractor position on any of our contracts could have a material adverse effect on our ability to win new business and our operating results. In addition, if the U.S. government elects to use a contract vehicle that we do not hold, we will not be able to compete for work under that contract vehicle as a prime contractor. We may earn less revenue than projected, or no revenue, under certain of our contracts. Many of our contracts with our clients are indefinite delivery, indefinite quantity, or ID/IQ, contracts, including GSA schedules and GWACs. ID/IQ contracts provide for the issuance by the client of orders for services or products under the contract, and often contain multi-year terms and unfunded ceiling amounts, which allow but do not commit the U.S. government to purchase products and services from contractors. Our ability to generate revenue under each of these types of contracts depends upon our ability to be awarded task orders for specific services by the client. ID/IQ contracts may be awarded to one contractor (single award) or several contractors (multiple award). Multiple contractors must compete under multiple award ID/IQ contracts for task orders to provide particular services, and contractors earn revenue only to the extent that they successfully compete for these task orders. In fiscal 2008, pro forma 2009 and fiscal 2010, our revenue under our GSA schedules and GWACs accounted for 29%, 27% and 23%, respectively, of our total revenue. A failure to be awarded task orders under such contracts would have a material adverse effect on our results of operations and financial condition. Our earnings and profitability may vary based on the mix of our contracts and may be adversely affected by our failure to accurately estimate or otherwise recover the expenses, time and resources for our contracts. We enter into three general types of U.S. government contracts for our services: cost-reimbursable, time-and-materials and fixed-price. For fiscal 2010, we derived 50% of our revenue from cost-reimbursable contracts, 38% from time-and-materials contracts and 12% from fixed-price contracts. For the six months ended September 30, 2010, we derived 51% of our revenue from cost-reimbursable contracts, 36% from time-and-materials contracts and 13% from fixed-price contracts. Each of these types of contracts, to varying degrees, involves the risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract and adversely affect our operating results. Under cost-reimbursable contracts, we are reimbursed for allowable costs up to a ceiling and paid a fee, which may be fixed or performance-based. If our actual costs exceed the contract ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. In particular, there is increasing focus by the U.S. government on the extent to which government contractors, including us, are able to receive reimbursement for employee compensation. Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain allowable expenses. We assume financial risk on time-and-materials contracts because our costs of performance may exceed these negotiated hourly rates. Under fixed-price contracts, we perform specific tasks for a pre-determined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher margin opportunities because we receive the benefits of any cost savings, but involve greater financial risk because we bear the impact of any cost overruns. The U.S. government has indicated that it intends to increase its use of fixed price contract procurements. In addition, the Department of Defense recently adopted purchasing guidelines that mark a shift towards fixed-priced procurement contracts. Because we assume the risk for cost overruns and contingent losses on fixed-price contracts, an increase in the percentage of fixed-price contracts in our contract mix would increase our risk of suffering losses. Additionally, our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract. We have recorded provisions in our consolidated financial statements for losses on our contracts, as required under GAAP, but our contract loss provisions may not be adequate to cover all actual losses that we may incur in the future. Our professional reputation is critical to our business, and any harm to our reputation could decrease the amount of business the U.S. government does with us, which could have a material adverse effect on our future revenue and growth prospects. We depend on our contracts with U.S. government agencies for substantially all of our revenue and if our reputation or relationships with these agencies were harmed, our future revenue and growth prospects would be materially and adversely affected. Our reputation and relationship with the U.S. government is a key factor in maintaining and growing revenue under contracts with the U.S. government. Negative press reports regarding poor contract performance, employee misconduct, information security breaches or other aspects of our business, or regarding government contractors generally, could harm our reputation. If our reputation with these agencies is negatively affected, or if we are suspended or debarred from contracting with government agencies for any reason, such actions would decrease the amount of business that the U.S. government does with us, which would have a material adverse effect on our future revenue and growth prospects. We use estimates in recognizing revenue and if we make changes to estimates used in recognizing revenue, our profitability may be adversely affected. Revenue from our fixed-price contracts is primarily recognized using the percentage-of-completion method with progress toward completion of a particular contract based on actual costs incurred relative to total estimated costs to be incurred over the life of the contract. Revenue from our cost-plus-award-fee contracts are based on our estimation of award fees over the life of the contract. Estimating costs at completion and award fees on our long-term contracts is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimate is recognized as events become known. In the event updated estimates indicate that we will experience a loss on the contract, we recognize the estimated loss at the time it is determined. Additional information may subsequently indicate that the loss is more or less than initially recognized, which requires further adjustments in our consolidated financial statements. Changes in the underlying assumptions, circumstances or estimates could result in adjustments that could have a material adverse effect on our future results of operations. We may not realize the full value of our backlog, which may result in lower than expected revenue. As of September 30, 2010, our total backlog was $11.0 billion, of which $3.1 billion was funded. We define backlog to include the following three components: Funded Backlog. Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts. Unfunded Backlog. Unfunded backlog represents the revenue value of orders for services under existing contracts for which funding has not been appropriated or otherwise authorized. Priced Options. Priced contract options represent 100% of the revenue value of all future contract option periods under existing contracts that may be exercised at our clients option and for which funding has not been appropriated or otherwise authorized. Backlog does not include any task orders under ID/IQ contracts, including GWACs and GSA schedules, except to the extent that task orders have been awarded to us under those contracts. We historically have not realized all of the revenue included in our total backlog, and we may not realize all of the revenue included in our total backlog in the future. There is a somewhat higher degree of risk in this regard with respect to unfunded backlog and priced options. In addition, there can be no assurance that our backlog will result in actual revenue in any particular period. This is because the actual receipt, timing and amount of revenue under contracts included in backlog are subject to various contingencies, including congressional appropriations, many of which are beyond our control. In particular, delays in the completion of the U.S. government s budgeting process and the use of continuing resolutions could adversely affect our ability to timely recognize revenue under our contracts included in backlog. Furthermore, the actual receipt of revenue from contracts included in backlog may never occur or may be delayed because: a program schedule could change or the program could be canceled; a contract s funding or scope could be reduced, modified or terminated early, including as a result of a lack of appropriated funds or as a result of cost cutting initiatives and other efforts to reduce U.S. government spending such as initiatives recently announced by the Secretary of Defense; in the case of funded backlog, the period of performance for the contract has expired; in the case of unfunded backlog, funding may not be made available; or, in the case of priced options, our clients may not exercise their options. In addition, headcount growth is the primary means by which we are able to recognize revenue growth. Any inability to hire additional appropriately qualified personnel or failure to timely and effectively deploy such additional personnel against funded backlog could negatively affect our ability to grow our revenue. Furthermore, even if our backlog results in revenue, the contracts may not be profitable. We may fail to attract, train and retain skilled and qualified employees with appropriate security clearances, which may impair our ability to generate revenue, effectively serve our clients and execute our growth strategy. Our business depends in large part upon our ability to attract and retain sufficient numbers of highly qualified individuals who may have advanced degrees in areas such as information technology as well as appropriate security clearances. We compete for such qualified personnel with other U.S. government contractors, the U.S. government and private industry, and such competition is intense. Personnel with the requisites skills, qualifications or security clearance may be in short supply or generally unavailable. In addition, our ability to recruit, hire and internally deploy former employees of the U.S. government is subject to complex laws and regulations, which may serve as an impediment to our ability to attract such former employees, and failure to comply with these laws and regulations may expose us and our employees to civil or criminal penalties. If we are unable to recruit and retain a sufficient number of qualified employees, our ability to maintain and grow our business and to effectively serve our clients could be limited and our future revenue and results of operations could be materially and adversely affected. Furthermore, to the extent that we are unable to make necessary permanent hires to appropriately serve our clients, we could be required to engage larger numbers of contracted personnel, which could reduce our profit margins. If we are able to attract sufficient numbers of qualified new hires, training and retention costs may place significant demands on our resources. In addition, to the extent that we experience attrition in our employee ranks, we may realize only a limited or no return on such invested resources, and we would have to expend additional resources to hire and train replacement employees. The loss of services of key personnel could also impair our ability to perform required services under some of our contracts and to retain such contracts, as well as our ability to win new business. We may fail to obtain and maintain necessary security clearances which may adversely affect our ability to perform on certain contracts. Many U.S. government programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business, and our existing clients could terminate their contracts with us or decide not to renew them. To the extent we are not able to obtain and maintain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts, as well as lose existing contracts, which may adversely affect our operating results and inhibit the execution of our growth strategy. Our profitability could suffer if we are not able to timely and effectively utilize our professionals. The cost of providing our services, including the utilization rate of our professionals, affects our profitability. Our utilization rate is affected by a number of factors, including: our ability to transition employees from completed projects to new assignments and to hire, assimilate and deploy new employees; our ability to forecast demand for our services and to maintain and deploy headcount that is aligned with demand; our ability to manage attrition; and our need to devote time and resources to training, business development and other non-chargeable activities. If our utilization rate is too low, our profit margin and profitability could suffer. Additionally, if our utilization rate is too high, it could have a material adverse effect on employee engagement and attrition, which would in turn have a material adverse impact on our business. We may lose one or more members of our senior management team or fail to develop new leaders which could cause the disruption of the management of our business. We believe that the future success of our business and our ability to operate profitably depends on the continued contributions of the members of our senior management and the continued development of new members of senior management. We rely on our senior management to generate business and execute programs successfully. In addition, the relationships and reputation that many members of our senior management team have established and maintain with our clients are important to our business and our ability to identify new business opportunities. We do not have any employment agreements providing for a specific term of employment with any member of our senior management. The loss of any member of our senior management or our failure to continue to develop new members could impair our ability to identify and secure new contracts, to maintain good client relations and to otherwise manage our business. Our employees or subcontractors may engage in misconduct or other improper activities which could harm our ability to conduct business with the U.S. government. We are exposed to the risk that employee or subcontractor fraud or other misconduct could occur. Misconduct by employees or subcontractors could include intentional or unintentional failures to comply with U.S. government procurement regulations, engaging in unauthorized activities or falsifying time records. Employee or subcontractor misconduct could also involve the improper use of our clients sensitive or classified information or the failure to comply with legislation or regulations regarding the protection of sensitive or classified information. It is not always possible to deter employee or subcontractor misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could materially harm our business. As a result of such misconduct, our employees could lose their security clearance and we could face fines and civil or criminal penalties, loss of facility clearance accreditation and suspension or debarment from contracting with the U.S. government, as well as reputational harm, which would materially and adversely affect our results of operations and financial condition. We face intense competition from many competitors, which could cause us to lose business, lower prices and suffer employee departures. Our business operates in a highly competitive industry, and we generally compete with a wide variety of U.S. government contractors, including large defense contractors, diversified service providers and small businesses. We also face competition from entrants into our markets including companies divested by large prime contractors in response to increasing scrutiny of organizational conflicts of interest issues. Some of these companies possess greater financial resources and larger technical staffs, and others have smaller and more specialized staffs. These competitors could, among other things: divert sales from us by winning very large-scale government contracts, a risk that is enhanced by the recent trend in government procurement practices to bundle services into larger contracts; force us to charge lower prices in order to win or maintain contracts; seek to hire our employees; or adversely affect our relationships with current clients, including our ability to continue to win competitively awarded engagements where we are the incumbent. If we lose business to our competitors or are forced to lower our prices or suffer employee departures, our revenue and our operating profits could decline. In addition, we may face competition from our subcontractors who, from time to time, seek to obtain prime contractor status on contracts for which they currently serve as a subcontractor to us. If one or more of our current subcontractors are awarded prime contractor status on such contracts in the future, it could divert sales from us and could force us to charge lower prices, which could have a material adverse effect on our revenue and profitability. Our failure to maintain strong relationships with other contractors, or the failure of contractors with which we have entered into a sub- or prime contractor relationship to meet their obligations to us or our clients, could have a material adverse effect on our business and results of operations. Maintaining strong relationships with other U.S. government contractors, who may also be our competitors, is important to our business and our failure to do so could have a material adverse effect on our business, prospects, financial condition and operating results. To the extent that we fail to maintain good relations with our subcontractors or other prime contractors due to either perceived or actual performance failures or other conduct, they may refuse to hire us as a subcontractor in the future or to work with us as our subcontractor. In addition, other contractors may choose not to use us as a subcontractor or choose not to perform work for us as a subcontractor for any number of additional reasons, including because they choose to establish relationships with our competitors or because they choose to directly offer services that compete with our business. As a prime contractor, we often rely on other companies to perform some of the work under a contract, and we expect to continue to depend on relationships with other contractors for portions of our delivery of services and revenue in the foreseeable future. If our subcontractors fail to perform their contractual obligations, our operating results and future growth prospects could be impaired. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of a subcontractor s personnel. In addition, if any of our subcontractors fail to deliver the agreed-upon supplies or perform the agreed-upon services on a timely basis, our ability to fulfill our obligations as a prime contractor may be jeopardized. Material losses could arise in future periods and subcontractor performance deficiencies could result in a client terminating a contract for default. A termination for default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders. We estimate that revenue derived from contracts under which we acted as a subcontractor to other companies represented 13% of our revenue for fiscal 2010. As a subcontractor, we often lack control over fulfillment of a contract, and poor performance on the contract could tarnish our reputation, even when we perform as required, and could cause other contractors to choose not to hire us as a subcontractor in the future. In addition, if the U.S. government terminates or reduces other prime contractors programs or does not award them new contracts, subcontracting opportunities available to us could decrease, which would have a material adverse effect on our financial condition and results of operations. Adverse judgments or settlements in legal disputes could result in materially adverse monetary damages or injunctive relief and damage our reputation. We are subject to, and may become a party to, a variety of litigation or other claims and suits that arise from time to time in the ordinary course of our business. For example, over time, we have had disputes with current and former employees involving alleged violations of civil rights, wage and hour, and worker s compensation laws. Further, as more fully described under Business Legal Proceedings, six former officers and stockholders of the Predecessor who had departed the firm prior to the acquisition have filed suits against our company and certain of our current and former directors and officers. Each of the suits arises out of the acquisition and alleges that the former stockholders are entitled to certain payments that they would have received if they had held their stock at the time of acquisition. The results of litigation and other legal proceedings are inherently uncertain and adverse judgments or settlements in some or all of these legal disputes may result in materially adverse monetary damages or injunctive relief against us. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future. The litigation and other claims described in this prospectus under the caption Business Legal Proceedings are subject to future developments and management s view of these matters may change in the future. Systems that we develop, integrate or maintain could experience security breaches which may damage our reputation with our clients and hinder future contract win rates. Many of the systems we develop, integrate or maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for U.S. government clients. Damage to our reputation or limitations on our eligibility for additional work or any liability resulting from a security breach in one of the systems we develop, install or maintain could have a material adverse effect on our results of operations. Internal system or service failures could disrupt our business and impair our ability to effectively provide our services to our clients, which could damage our reputation and have a material adverse effect on our business and results of operations. We create, implement and maintain information technology and engineering systems, and provide services that are often critical to our clients operations, some of which involve classified or other sensitive information and may be conducted in war zones or other hazardous environments. We are subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our or our clients businesses and could damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations, which could have a material adverse effect on our business and results of operations. If our systems, services or other applications have significant defects or errors, are subject to delivery delays or fail to meet our clients expectations, we may: lose revenue due to adverse client reaction; be required to provide additional services to a client at no charge; receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain clients; or suffer claims for substantial damages. In addition to any costs resulting from contract performance or required corrective action, these failures may result in increased costs or loss of revenue if they result in clients postponing subsequently scheduled work or canceling or failing to renew contracts. Our errors and omissions insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. The successful assertion of any large claim against us could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs, may be a distraction to our management and may harm our client relationships. In certain new business areas, we may not be able to obtain sufficient insurance and may decide not to accept or solicit business in these areas. The growth of our business entails risks associated with new relationships, clients, capabilities, service offerings and maintaining our collaborative culture. We are focused on growing our presence in our addressable markets by: expanding our relationships with existing clients, developing new clients by leveraging our core competencies, creating new capabilities to address our clients emerging needs and undertaking business development efforts focused on identifying near-term developments and long-term trends that may pose significant challenges for our clients. These efforts entail inherent risks associated with innovation and competition from other participants in those areas and potential failure to help our clients respond to the challenges they face. As we attempt to develop new relationships, clients, capabilities and service offerings, these efforts could harm our results of operations due to, among other things, a diversion of our focus and resources, actual costs and opportunity costs of pursuing these opportunities in lieu of others, and these efforts could be unsuccessful. In addition, our ability to grow our business by leveraging our operating model to efficiently and effectively deploy our people across our client base is largely dependent on our ability to maintain our collaborative culture. To the extent that we are unable to maintain our culture for any reason, we may be unable to grow our business. Any such failure could have a material adverse effect on our business and results of operations. We and our subsidiaries may incur debt in the future, which could substantially reduce our profitability, limit our ability to pursue certain business opportunities, and reduce the value of your investment. In connection with the acquisition and the recapitalization transaction, which refers to the December 2009 payment of a special dividend and repayment of a portion of the deferred payment obligation and the related amendments to our credit agreements, and as a result of our business activities, we have incurred a substantial amount of debt. As of September 30, 2010, on an as adjusted basis after giving effect to this offering and the use of the net proceeds therefrom as described in Use of Proceeds, we would have had approximately $1,253.6 million of debt outstanding. The instruments governing our indebtedness may not prevent us or our subsidiaries from incurring additional debt in the future or other obligations that do not constitute indebtedness, which could increase the risks described below and lead to other risks. In addition, we may, at our option and subject to certain closing conditions including pro forma compliance with financial covenants, increase the borrowing capacity under our senior credit facilities without the consent of any person other than the institutions agreeing to provide all or any portion of such increase, to an amount not to exceed $100.0 million. The amount of our debt or such other obligations could have important consequences for holders of our Class A common stock, including, but not limited to: our ability to satisfy obligations to lenders may be impaired, resulting in possible defaults on and acceleration of our indebtedness; our ability to obtain additional financing for refinancing of existing indebtedness, working capital, capital expenditures, product and service development, acquisitions, general corporate purposes and other purposes may be impaired; a substantial portion of our cash flow from operations could be dedicated to the payment of the principal and interest on our debt; we may be increasingly vulnerable to economic downturns and increases in interest rates; our flexibility in planning for and reacting to changes in our business and the industry may be limited; and we may be placed at a competitive disadvantage relative to other firms in our industry. Our credit facilities contain financial and operating covenants that limit our operations and could lead to adverse consequences if we fail to comply with them. Our senior credit facilities and our mezzanine credit facility, which we refer to together as our credit facilities, contain financial and operating covenants relating to, among other things, interest coverage and leverage ratios, as well as limitations on mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, indebtedness and liens, dividends, repurchase of shares of capital stock and options to purchase shares of capital stock, transactions with affiliates, sale and leaseback transactions and restricted payments. The revolving credit facility and the Tranche A term facility mature on July 31, 2014. The Tranche B term facility and Tranche C term facility mature on July 31, 2015. Our mezzanine credit facility matures on July 31, 2016. Failure to meet these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of debt, or changes in general economic conditions, which may be beyond our control. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders, which could harm our business and operations. Many of our contracts with the U.S. government are classified or subject to other security restrictions, which may limit investor insight into portions of our business. For fiscal 2010 and the six months ended September 30, 2010, we derived a substantial portion of our revenue from contracts with the U.S. government that are classified or subject to security restrictions which preclude the dissemination of certain information. Because we are limited in our ability to provide details about these contracts, the various risks associated with these contracts or any dispute or claims relating to such contracts, you will have less insight into a substantial portion of our business and therefore may be less able to fully evaluate the risks related to that portion of our business. If we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate cash flow, provide working capital or continue our business operations. We depend on the timely collection of our receivables to generate cash flow, provide working capital and continue our business operations. If the U.S. government or any prime contractor for whom we are a subcontractor fails to pay or delays the payment of invoices for any reason, our business and financial condition may be materially and adversely affected. The U.S. government may delay or fail to pay invoices for a number of reasons, including lack of appropriated funds, lack of an approved budget, or as a result of audit findings by government regulatory agencies. Some prime contractors for whom we are a subcontractor have significantly fewer financial resources than we do, which may increase the risk that we may not be paid in full or that payment may be delayed. Recent efforts by the U.S. government to revise its organizational conflict of interest rules could limit our ability to successfully compete for new contracts or task orders, which would adversely affect our results of operations. Recent efforts by the U.S. government to reform its procurement practices have focused, among other areas, on the separation of certain types of work to facilitate objectivity and avoid or mitigate organizational conflicts of interest and the strengthening of regulations governing organizational conflicts of interest. Organizational conflicts of interest may arise from circumstances in which a contractor has: impaired objectivity; unfair access to non-public information; or the ability to set the ground rules for another procurement for which the contractor competes. A focus on organizational conflicts of interest issues has resulted in legislation and a proposed regulation aimed at increasing organizational conflicts of interest requirements, including, among other things, separating sellers of products and providers of advisory services in major defense acquisition programs. In addition, we expect the U.S. government to adopt a FAR rule to address organizational conflicts of interest issues that will apply to all government contractors, including us, in Department of Defense and other procurements. A future FAR rule may also increase the restrictions in current organizational conflicts of interest regulations and rules. To the extent that proposed and future organizational conflicts of interest laws, regulations, and rules, limit our ability to successfully compete for new contracts or task orders with the U.S. government, either because of organizational conflicts of interest issues arising from our business, or because companies with which we are affiliated, including through Carlyle, or with which we otherwise conduct business, create organizational conflicts of interest issues for us, our results of operations could be materially and adversely affected. Acquisitions could result in operating difficulties or other adverse consequences to our business. As part of our future operating strategy, we may choose to selectively pursue acquisitions. This could pose many risks, including: we may not be able to identify suitable acquisition candidates at prices we consider attractive; we may not be able to compete successfully for identified acquisition candidates, complete acquisitions or accurately estimate the financial effect of acquisitions on our business; future acquisitions may require us to issue common stock or spend significant cash, resulting in dilution of ownership or additional debt leverage; we may have difficulty retaining an acquired company s key employees or clients; we may have difficulty integrating acquired businesses, resulting in unforeseen difficulties, such as incompatible accounting, information management, or other control systems, and greater expenses than expected; acquisitions may disrupt our business or distract our management from other responsibilities; as a result of an acquisition, we may incur additional debt and we may need to record write-downs from future impairments of intangible assets, each of which could reduce our future reported earnings; and we may have difficulty integrating personnel from the acquired company with our people and our core values. In connection with any acquisition that we make, there may be liabilities that we fail to discover or that we inadequately assess, and we may fail to discover any failure of a target company to have fulfilled its contractual obligations to the U.S. government or other clients. Acquired entities may not operate profitably or result in improved operating performance. Additionally, we may not realize anticipated synergies, business growth opportunities, cost savings and other benefits we anticipate, which could have a material adverse effect on our business and results of operations. Risks Related to Our Industry Our U.S. government contracts may be terminated by the government at any time and may contain other provisions permitting the government to discontinue contract performance, and if lost contracts are not replaced, our operating results may differ materially and adversely from those anticipated. U.S. government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other things, to: terminate existing contracts, with short notice, for convenience as well as for default; reduce orders under or otherwise modify contracts; for contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor furnished cost or pricing data during negotiations that was not complete, accurate and current; for some contracts, (i) demand a refund, make a forward price adjustment or terminate a contract for default if a contractor provided inaccurate or incomplete data during the contract negotiation process and (ii) reduce the contract price under certain triggering circumstances, including the revision of price lists or other documents upon which the contract award was predicated; terminate our facility security clearances and thereby prevent us from receiving classified contracts; cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; decline to exercise an option to renew a multi-year contract or issue task orders in connection with ID/IQ contracts; claim rights in solutions, systems and technology produced by us, appropriate such work-product for their continued use without continuing to contract for our services and disclose such work-product to third parties, including other U.S. government agencies and our competitors, which could harm our competitive position; prohibit future procurement awards with a particular agency due to a finding of organizational conflicts of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors, or the existence of conflicting roles that might bias a contractor s judgment; subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction or modification of the awarded contract; and suspend or debar us from doing business with the U.S. government. If a U.S. government client were to unexpectedly terminate, cancel or decline to exercise an option to renew with respect to one or more of our significant contracts, or suspend or debar us from doing business with the U.S. government, our revenue and operating results would be materially harmed. The U.S. government may revise its procurement, contract or other practices in a manner adverse to us. The U.S. government may: revise its procurement practices or adopt new contract laws, rules and regulations, such as cost accounting standards, organizational conflicts of interest and other rules governing inherently governmental functions at any time; reduce, delay or cancel procurement programs resulting from U.S. government efforts to improve procurement practices and efficiency; limit the creation of new government-wide or agency-specific multiple award contracts; face restrictions or pressure from government employees and their unions regarding the amount of services the U.S. government may obtain from private contractors; award contracts on a technically acceptable/lowest cost basis in order to reduce expenditures, and we may not be the lowest cost provider of services; change the basis upon which it reimburses our compensation and other expenses or otherwise limit such reimbursements; and at its option, terminate or decline to renew our contracts. In addition, any new contracting methods could be costly or administratively difficult for us to implement and could adversely affect our future revenue. Any such changes to the U.S. government s procurement practices or the adoption of new contracting rules or practices could impair our ability to obtain new or re-compete contracts and any such changes or increased associated costs could materially and adversely affect our results of operations. The U.S. government may prefer minority-owned, small and small disadvantaged businesses, therefore, we may not win contracts we bid for. As a result of the Small Business Administration set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the Small Business Administration set-aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recompete on incumbent work that is placed in the set-aside program. Our contracts, performance and administrative processes and systems are subject to audits, reviews, investigations and cost adjustments by the U.S. government, which could reduce our revenue, disrupt our business or otherwise materially adversely affect our results of operations. U.S. government agencies routinely audit, review and investigate government contracts and government contractors administrative processes and systems. These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards, including applicable government cost accounting standards. For example, we recently responded to an August 5, 2010 Notice of Intent to Disallow Costs from the Defense Contract Management Agency, to disallow approximately $17 million of subcontractor labor costs relating to services provided in fiscal 2005. These agencies also review our compliance with government regulations and policies and the Defense Contract Audit Agency, or the DCAA, audits, among other areas, the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. In particular, over time the DCAA has increased and may continue to increase the proportion of employee compensation that it deems unallowable and the size of the employee population whose compensation is disallowed, which will continue to materially and adversely affect our results of operations or financial condition. Any costs found to be unallowable under a contract will not be reimbursed, and any such costs already reimbursed must be refunded. Moreover, if any of the administrative processes and systems are found not to comply with government imposed requirements, we may be subjected to increased government scrutiny and approval that could delay or otherwise adversely affect our ability to compete for or perform contracts. Unfavorable U.S. government audit, review or investigation results could subject us to civil or criminal penalties or administrative sanctions, and could harm our reputation and relationships with our clients and impair our ability to be awarded new contracts. For example, if our invoicing system were found to be inadequate following an audit by the DCAA, our ability to directly invoice U.S. government payment offices could be eliminated. As a result, we would be required to submit each invoice to the DCAA for approval prior to payment, which could materially increase our accounts receivable days sales outstanding and adversely affect our cash flow. An unfavorable outcome to an audit, review or investigation by any U.S. government agency could materially and adversely affect our relationship with the U.S. government. If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the U.S. government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Provisions that we have recorded in our financial statements as a compliance reserve may not cover actual losses. Furthermore, the disallowance of any costs previously charged could directly and negatively affect our current results of operations for the relevant prior fiscal periods, and we could be required to repay any such disallowed amounts. Each of these results could materially and adversely affect our results of operations or financial condition. A delay in the completion of the U.S. government s budget process could result in a reduction in our backlog and have a material adverse effect on our revenue and operating results. On an annual basis, the U.S. Congress must approve budgets that govern spending by each of the federal agencies we support. When the U.S. Congress is unable to agree on budget priorities, and thus is unable to pass the annual budget on a timely basis, the U.S. Congress typically enacts a continuing resolution. A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle. On September 30, 2010, President Obama signed a continuing resolution passed by the U.S. Congress into law. Under this continuing resolution, funding may not be available for new projects. In addition, when government agencies operate on the basis of a continuing resolution, they may delay funding we expect to receive on contracts we are already performing. Any such delays would likely result in new business initiatives being delayed or cancelled and a reduction in our backlog, and could have a material adverse effect on our revenue and operating results. Risks Related to Our Common Stock and This Offering Booz Allen Holding is a holding company with no operations of its own, and it depends on its subsidiaries for cash to fund all of its operations and expenses, including to make future dividend payments, if any. The operations of Booz Allen Holding are conducted almost entirely through its subsidiaries and its ability to generate cash to meet its debt service obligations or to pay dividends is highly dependent on the earnings and the receipt of funds from its subsidiaries via dividends or intercompany loans. We do not currently expect to declare or pay dividends on our Class A common stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our Class A common stock, none of our subsidiaries will be obligated to make funds available to us for the payment of dividends. Further, our credit facilities significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. Our principal stockholder could exert significant influence over our company. As of November 4, 2010, Carlyle, through Coinvest, owned in the aggregate shares of our common stock representing 79% of our outstanding voting power. After completion of this offering, Carlyle will own in the aggregate shares of our common stock representing 71% of our outstanding voting power, or 70% if the underwriters exercise their over-allotment option in full (in each case, excluding shares of common stock with respect to which Carlyle has received a voting proxy pursuant to new irrevocable proxy and tag-along agreements). Under the terms of the new irrevocable proxy and tag-along agreements Carlyle will be able to exercise voting power over shares of our common stock owned by a number of other stockholders, including our executive officers, with respect to the election and removal of directors and change of control transactions. See Certain Relationships and Related Party Transactions Related Person Transactions Irrevocable Proxy and Tag-Along Agreements. As a result, Carlyle will have a controlling influence over all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. In addition, Coinvest is a party to the stockholders agreement pursuant to which Carlyle currently has the ability to cause the election of a majority of our Board. Under the terms of the amended and restated stockholders agreement to be entered into in connection with this offering, Carlyle will continue to have the right to nominate a majority of the members of our Board and to exercise control over matters requiring stockholder approval and our policy and affairs, for example, by being able to direct the use of proceeds received from this and future security offerings. See Certain Relationships and Related Party Transactions Related Person Transactions Stockholders Agreement. In addition, following the consummation of this offering, we will be a controlled company within the meaning of the New York Stock Exchange rules and, as a result, currently intend to rely on exemptions from certain corporate governance requirements. The concentrated holdings of funds affiliated with Carlyle, certain provisions of the amended and restated stockholders agreement to be entered into prior to the completion of this offering and the presence of Carlyle s nominees on our Board may result in a delay or the deterrence of possible changes in control of our company, which may reduce the market price of our common stock. The interests of Carlyle may not always coincide with the interests of the other holders of our common stock. Carlyle is in the business of making investments in companies, and may from time to time in the future acquire controlling interests in businesses engaged in management and technology consulting that complement or directly or indirectly compete with certain portions of our business. If Carlyle pursues such acquisitions in our industry, those acquisition opportunities may not be available to us. In addition, to the extent that Carlyle acquires a controlling interest in one or more companies that provide services or products to the U.S. government, our affiliation with any such company through Carlyle could create organizational conflicts of interest and similar issues for us under federal procurement laws and regulations. See Risk Related to Our Business Recent efforts by the U.S. government to revise its organizational conflicts of interest rules could limit our ability to successfully compete for new contracts or task orders, which would adversely affect our results of operations. We urge you to read the discussions under the headings Certain Relationships and Related Party Transactions and Security Ownership of Certain Beneficial Owners and Management for further information about the equity interests held by Carlyle and members of our senior management. Investors in this offering will experience immediate dilution in net tangible book value per share. The initial public offering price per share will significantly exceed the net tangible book value per share of our common stock. As a result, investors in this offering will experience immediate dilution of $22.66 in net tangible book value per share based on an initial public offering price of $18.00, which is the midpoint of the price range set forth on the cover page of this prospectus. This dilution occurs in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors in this offering may also experience additional dilution as a result of shares of Class A common stock that may be issued in connection with a future acquisition. Accordingly, in the event that we are liquidated, investors may not receive the full amount or any of their investment. Our financial results may vary significantly from period to period as a result of a number of factors many of which are outside our control, which could cause the market price of our Class A common stock to decline. Our financial results may vary significantly from period to period in the future as a result of many external factors that are outside of our control. Factors that may affect our financial results include those listed in this Risk Factors section and others such as: any cause of reduction or delay in U.S. government funding (e.g., changes in presidential administrations that delay timing of procurements); fluctuations in revenue earned on existing contracts; commencement, completion or termination of contracts during a particular period; a potential decline in our overall profit margins if our other direct costs and subcontract revenue grow at a faster rate than labor-related revenue; strategic decisions by us or our competitors, such as changes to business strategy, strategic investments, acquisitions, divestitures, spin offs and joint ventures; a change in our contract mix to less profitable contracts; changes in policy or budgetary measures that adversely affect U.S. government contracts in general; variable purchasing patterns under U.S. government GSA schedules, blanket purchase agreements, which are agreements that fulfill repetitive needs under GSA schedules, and ID/IQ contracts; changes in demand for our services and solutions; fluctuations in our staff utilization rates; seasonality associated with the U.S. government s fiscal year; an inability to utilize existing or future tax benefits, including those related to our NOLs or stock-based compensation expense, for any reason, including a change in law; alterations to contract requirements; and adverse judgments or settlements in legal disputes. A decline in the price of our Class A common stock due to any one or more of these factors could cause the value of your investment to decline. A majority of our outstanding indebtedness is secured by substantially all of our consolidated assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations. In addition, the existence of these security interests may adversely affect our financial flexibility. Indebtedness under our senior credit facilities is secured by a lien on substantially all of our assets. Accordingly, if an event of default were to occur under our senior credit facilities, the senior secured lenders under such facilities would have a prior right to our assets, to the exclusion of our general creditors in the event of our bankruptcy, insolvency, liquidation or reorganization. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under our senior credit facilities), resulting in all or a portion of our assets being unavailable to satisfy the claims of our unsecured indebtedness. Only after satisfying the claims of our unsecured creditors and our subsidiaries unsecured creditors would any amount be available for our equity holders. The pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under these financing arrangements, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility. As of September 30, 2010, we had $1,013.8 million of indebtedness outstanding under our senior credit facilities and had $221.7 million of capacity available for additional borrowings under the revolving portion of our senior credit facilities (excluding the $21.3 million commitment by the successor entity to Lehman Brothers Commercial Bank). In addition, we may, at our option and subject to certain closing conditions including pro forma compliance with financial covenants, increase the senior credit facilities without the consent of any person other than the institutions agreeing to provide all or any portion of such increase, in an amount not to exceed $100.0 million. See Description of Certain Indebtedness Senior Credit Facilities Guarantees; Security. Our Class A common stock has no prior public market, and our stock price could be volatile and could decline after this offering. Before this offering, our Class A common stock had no public market. We will negotiate the initial public offering price per share with the representatives of the underwriters and, therefore, that price may not be indicative of the market price of our common stock after the offering. We cannot assure you that an active public market for our Class A common stock will develop after this offering or if it does develop, it may not be sustained. In the absence of a public trading market, you may not be able to liquidate your investment in our common stock. In addition, the market price of our common stock could be subject to significant fluctuations after this offering. Among the factors that could affect our stock price are: quarterly variations in our operating results; changes in contract revenue and earnings estimates or publication of research reports by analysts; speculation in the press or investment community; investor perception of us and our industry; strategic actions by us or our competitors, such as significant contracts, acquisitions or restructurings; actions by institutional stockholders or other large stockholders, including future sales; our relationship with U.S. government agencies; changes in U.S. government spending; changes in accounting principles; and general economic market conditions. In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. In the past, following periods of volatility in the market price of a company s securities, class action litigation has often been instituted against the company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management s attention and resources, which would harm our business, operating results and financial condition. Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes Oxley Act of 2002, will be expensive and time consuming and any delays or difficulty in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price. As a private company, we have not been subject to the requirements of the Sarbanes-Oxley Act of 2002. As a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, or the SEC, as well as the New York Stock Exchange rules, will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations will require us to devote significant management time and will place significant additional demands on our finance and accounting staff and on our financial, accounting and information systems. We expect to hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased directors fees and director and officer liability insurance costs, registrar and transfer agent fees, listing fees, as well as other expenses. In particular, upon completion of this offering, the Sarbanes-Oxley Act of 2002 will require us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework, and to report on our conclusions as to the effectiveness of our internal controls. It will also require an independent registered public accounting firm to test our internal control over financial reporting and report on the effectiveness of such controls for fiscal 2012 and subsequent years. In addition, upon completion of this offering, we will be required under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal control over financial reporting as of March 31, 2012 and in future periods, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, the New York Stock Exchange, or other regulatory authorities. Provisions in our organizational documents and in the Delaware General Corporation Law may prevent takeover attempts that could be beneficial to our stockholders. Our amended and restated certificate of incorporation and amended and restated bylaws include a number of provisions that may have the effect of delaying, deterring, preventing or rendering more difficult a change in control of Booz Allen Holding that our stockholders might consider in their best interests. These provisions include: establishment of a classified Board, with staggered terms; granting to the Board the sole power to set the number of directors and to fill any vacancy on the Board; limitations on the ability of stockholders to remove directors if a group, as defined under Section 13(d)(3) of the Exchange Act, ceases to own more than 50% of our voting common stock; granting to the Board the ability to designate and issue one or more series of preferred stock without stockholder approval, the terms of which may be determined at the sole discretion of the Board; a prohibition on stockholders from calling special meetings of stockholders; the establishment of advance notice requirements for stockholder proposals and nominations for election to the Board at stockholder meetings; requiring approval of two-thirds of stockholders to amend the bylaws; and prohibiting our stockholders from acting by written consent if a group ceases to own more than 50% of our voting common stock. These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. In addition, we expect to opt out of Section 203 of the Delaware General Corporation Law, which would have otherwise imposed additional requirements regarding mergers and other business combinations, until Coinvest and its affiliates no longer own more than 20% of our Class A common stock. After such time, we will be governed by Section 203. Our amended and restated certificate of incorporation and amended and restated by-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders. See Description of Capital Stock for additional information on the anti-takeover measures applicable to us. Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly. Immediately following this offering, Carlyle will own 95,660,000 shares of our Class A common stock, or 79% of our outstanding Class A common stock. If the underwriters exercise their overallotment option in full, Carlyle will own 78% of our outstanding Class A common stock. If Carlyle sells, or the market perceives that Carlyle intends to sell, a substantial portion of its beneficial ownership interest in us in the public market, the market price of our Class A common stock could decline significantly. The sales also could make it more difficult for us to sell equity or equity-related securities at a time and price that we deem appropriate. After this offering, 120,622,350 shares of our Class A common stock will be outstanding. Of these shares, 14,000,000 shares of our Class A common stock sold in this offering will be freely tradable, without restriction, in the public market unless purchased by our affiliates (as that term is defined by Rule 144 under the Securities Act of 1933, or Securities Act) and all of the remaining shares of Class A common stock, as well as outstanding shares of our Class B non-voting common stock, Class C restricted common stock and Class E special voting common stock, subject to certain exceptions, will be subject to a 180-day lock-up by virtue of either contractual lock-up agreements or pursuant to the terms of the amended and restated stockholders agreement. Morgan Stanley Co. Incorporated and Barclays Capital Inc. may, in their discretion, permit our directors, officers and current stockholders who are subject to these lock-ups to sell shares prior to the expiration of the 180-day lock-up period. In addition, any Class A common stock purchased by participants in our directed share program pursuant to which the underwriters have reserved, at our request, up to 10% of the Class A common stock offered by this prospectus for sale to certain of our senior personnel and individuals employed by or associated with our affiliates, will be subject to a 180-day lock-up restriction. See Shares of Common Stock Eligible for Future Sale Lock-Up Agreements. After the lock-up agreements pertaining to this offering expire, up to an additional 99,539,470 shares of our Class A common stock, all of which are held by directors, executive officers and other affiliates, will be restricted securities within the meaning of Rule 144 under the Securities Act eligible for resale in the public market subject to volume, manner of sale and holding period limitations under Rule 144 under the Securities Act. The remaining 7,082,880 shares of Class A common stock outstanding will also be restricted securities within the meaning of Rule 144 under the Securities Act eligible for resale in the public market subject to applicable volume, manner of sale, holding period and other limitations of Rule 144 as well as pursuant to an exemption from registration under Rule 701 under the Securities Act. After the lock-up agreements relating to this offering expire, 16,727,079 shares of our Class A common stock will be issuable upon (1) transfer of our Class B non-voting common stock and Class C restricted common stock and (2) the exercise of outstanding stock options relating to our outstanding Class E special voting common stock. In addition, the 25,133,420 shares of our Class A common stock underlying options that are either subject to the terms of our Equity Incentive Plan or reserved for future issuance under our Equity Incentive Plan will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act to the extent such shares are not otherwise registered for sale under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our Class A common stock could decline substantially. 5,172,923 of the options granted under our Officers Rollover Stock Plan and Equity Incentive Plan will become exercisable on June 30, 2011 and the shares of Class A common stock underlying such options issued upon exercise thereof will be freely transferable upon issuance. For additional information, see Shares of Common Stock Eligible for Future Sale.

parsed_sections/risk_factors/2010/BETRF_betterlife_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ Risk Factors Please consider the following risk factors before deciding to invest in our common stock. This offering and any investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this Prospectus before deciding whether to purchase our common stock. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. The trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Our Business and Industry There is substantial doubt as to whether we will continue operations. If we discontinue operations, you could lose your investment. Our financial statements have been prepared on the going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business. However, as at October 31, 2009 we had not earned any revenues and had an accumulated deficit of $879,216. We anticipate that we will incur increased expenses without realizing sufficient revenues (if any) to offset those expenses, and we therefore expect to incur significant losses for the foreseeable future. Our ability to continue our operations is dependent on obtaining additional financing and generating future revenues, and no assurance can be given that we will successfully be able to do so. Accordingly, our auditor has indicated in our financial statements that these factors raise substantial doubt about our ability to continue as a going concern. Importantly, the inclusion in our financial statements of a going concern opinion may negatively impact our ability to raise future financing and achieve future revenue. The threat of our ability to continue as a going concern will be removed only when, in the opinion of our auditor, our revenues have reached a level that is able to sustain our business operations. If we are unable to obtain additional financing from outside sources and eventually generate enough revenues, we may be forced to sell a portion or all of our assets, or curtail or discontinue our operations. If any of these happens, you could lose all or part of your investment. Our financial statements do not include any adjustments to our recorded assets or liabilities that might be necessary if we become unable to continue as a going concern. We have incurred operating losses in each year since our inception and expect to continue to incur substantial and increasing losses for the foreseeable future. If we cannot generate sufficient revenues to operate profitably, we may suspend or cease our operations. We have not generated any revenue since our inception on June 10, 2002 and we have incurred operating and net losses in each year of our existence. Our net loss was $122,578 for the year ended January 31, 2008, $653,761 for the year ended January 31, 2009 and $879,216 from our inception on June 10, 2002 to October 31, 2009. As of October 31, 2009 we had an accumulated deficit of $879,216. We expect to incur substantial and increasing losses for the foreseeable future as we develop, seek regulatory approval for and commercialize our product candidates and pursue our other research and development activities. If our flagship product NK-001 is not successful in clinical trials, does not gain regulatory approval or does not achieve market acceptance, we may never generate any revenue. We also cannot assure you that we will be profitable even if we successfully commercialize NK-001 or any of our other product candidates. If we fail to generate sufficient revenues to operate profitability, or if we are unable to fund our continuing losses, you could lose all or part of your investment. Our business is to research and develop new applications of existing therapeutic drugs and enhancements to those drugs, and if we are unable to market our new applications and enhancements we may never generate revenues. We have concentrated our efforts on developing new, proprietary substances, methods and processes intended to enhance the therapeutic effects of existing anti-inflammatory drugs in the treatment of diseases mediated by acute and chronic inflammatory conditions. The existing drugs that form the basis of our efforts to develop our new substances, methods and processes are relatively new, and any scientific evidence that may exist to support the feasibility of our goals is not conclusive. If we are not successful in developing and marketing any new applications or enhancements for these existing drugs we may never generate revenues and our business may fail. We will require substantial additional funds to complete our research and development activities, and if such funds are not available we may need to significantly curtail or cease our operations. We will require substantial funds to research, develop, test and protect our product candidates, and to manufacture and market any such candidates that may be approved for commercial sale. Based on our current cash levels, we do not have sufficient cash to meet our planned day-to-day operating needs through March 2010, including our planned research and development activities. We raised approximately USD$17,840 (CDN$20,421) through a private placement in July 2009, however those funds have been allocated toward the preparation of this registration statement and related expenses. Based on our planned research and development activities, we anticipate that we will require additional funds of approximately $2,513,400 to meet our planned day-to-day operating needs for the next 12 months (beginning March 2010). If we do not raise sufficient funds by the end of March 2010 our plan of operation will be delayed until such time as we raise sufficient funds, provided we are able to do so. Further, the cost of carrying out our operating activities and research and development activities is not fixed, and our cash levels may at any time prove to be insufficient to finance them. Our financing needs may change substantially because a number of factors which are difficult to predict or which may be outside of our control. These include increased competition, the costs of licensing existing drugs and protecting rights to our proprietary technology, the resources required to complete pre-clinical and clinical studies, and the length and results of the regulatory approval process. We may not succeed in raising the additional funds that we require because such funds may not be available to us on acceptable terms, if at all. We intend to seek additional funding through strategic alliances or through public or private sales of our equity securities, and we may also obtain equipment leases and pursue opportunities to obtain debt financing in the future. If we are unable to obtain sufficient funding on a timely basis, we may be forced to significantly curtail or cease our operations. Our inability to complete our research and development projects in a timely manner could have a material adverse effect of our results of operations, financial condition and cash flows. If our research and development projects are not completed in a timely fashion (by the end of July 2010) the Company could experience: substantial additional cost for re-application to obtain clinical trial approvals; additional competition as other groups may enter the area of use of anti-inflammatory application to treat neurocognitive impairment; up to six months delay in obtaining approvals; and delay in obtaining future inflow of cash from financing or partnership activities, any of which could have a material adverse effect of our results of operations, financial condition and cash flows. Any products that we may develop will be required to undergo a time-consuming, costly and burdensome pre-market approval process, and if we are unable to obtain regulatory approval for our products we may never become profitable. Any products that we may develop will be subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. In the United States, for example, the prospective therapeutic products that we intend to develop and market are regulated by the FDA under its new drug development and review process. Before such therapeutic products can be marketed, we must obtain clearance from the FDA by submitting an investigational new drug application, then by successfully completing human testing under three phases of clinical trials, and finally by submitting a new drug application. Our development stage product NK-001 is a re-profiled product based on Etanercept, a drug that has been approved by the FDA and by the Medicines Control Council of the Department of Health (South Africa), where we intend to conduct our clinical trials, As such, we do not need to receive investigational new drug approval (or the South African equivalent) before proceeding with our development of NK-001. We intend to conduct clinical trials of NK-001 in South Africa and, if our trials are successful, we plan to initiate a new drug application process with the FDA. To date, we have received approval for our proposed Phase II clinical trial protocol for NK-001 from the Medicines Control Council and from the South African Central Ethics Board. Unlike NK-001, NK-002 is properly classified as a new drug and will first require investigational new drug approval (or the equivalent) in the jurisdiction where we decide to conduct clinical trials. Investigational new drug applications must be supported by extensive pre-clinical research and, if obtained, must be followed by not less than three successful phases of clinical trials before a new drug application can be submitted. We have not established any timelines for filing any FDA applications for either of our products, and we do not anticipate doing so until we have completed the relevant research and development. The time required to obtain approvals for our prospective therapeutic products from the FDA and other agencies in foreign locales with similar processes is unpredictable. We expect to be able to accelerate the approval process and to increase the chances of approval by using existing and approved drugs as the basis for our own technology. However, we cannot guarantee that our expectations will be realized, and there is no assurance that we will ever receive regulatory approval to use our proprietary substances, methods and processes. If we do not obtain such regulatory approval, we may never become profitable. We may not commence clinical testing for any of our prospective therapeutic products and the commercial value of any clinical study that we may conduct will depend significantly upon our choice of indication and our patient population selection. If we are unable to commence clinical testing or if we make a poor choice in terms of clinical strategy, we may never achieve revenues. In order to commence clinical testing we must successfully complete and obtain positive scientific results from pre-clinical studies and, in the case of an existing drug that we are re-profiling for a new indication, adopt existing pre-clinical or early stage clinical studies to our own research. If we successfully complete any clinical study of our own, the commercial value of any such study will significantly depend upon our choice of indication and our patient population selection for that indication. We plan to employ existing drugs for new indications, and these drugs may have the ability to treat different kinds of indications. As a result, we may incorrectly assess the market opportunities of an indication or may incorrectly estimate or fail to fully appreciate the scientific and technological difficulties associated with treating an indication. In addition, the quality and robustness of the results and data of any clinical study that we may conduct will depend upon our selection of a patient population for clinical testing, and if we select a patient population that is not representative of our intended target market, or rely on pre-existing clinical results and data that do not reflect our intended target market or selected patient population, we may be forced to complete supplemental pre-clinical and/or clinical testing of our product candidates or terminate our research and development activities related to those candidates. The utility of any clinical results and data produced by third parties that we may apply to our own research will also depend upon the similarity between the patient population studied to obtain those results and data and the patient population that we select for our own clinical testing. Our inability to commence clinical testing or our choice of clinical strategy could therefore compromise our business prospects and prevent us from achieving revenues. Our clinical trials may fail to adequately demonstrate the safety and efficacy of our product candidates, which could force us to abandon our business plan. Before obtaining regulatory approval for the commercial sale of any of our product candidates, we must demonstrate through lengthy, complex and expensive pre-clinical testing and clinical trials that each product is both safe and effective for use in each target indication. Clinical trial results are inherently difficult to predict, and the results we have obtained or may obtain from third-party trials or from our own trials may not be indicative of results from future trials. We may also suffer significant setbacks in advanced clinical trials even after obtaining promising results in earlier studies. Although we intend to modify any of our protocols in ongoing studies to address any setbacks, there can be no assurance that these modifications will be adequate or that these or other factors will not have a negative effect on the results of our clinical trials. This could significantly disrupt our efforts to obtain regulatory approvals and commercialize our product candidates. Furthermore, we may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable safety risk to patients, either in the form of undesirable side effects or otherwise. If we cannot show that our product candidates are both safe and effective in clinical trials, we may be forced to abandon our business plan. We rely on third parties to conduct our pre-clinical and clinical trials. If these third parties do not perform as contractually required or otherwise expected we may not be able to obtain regulatory approval for our product candidates, which may prevent us from becoming profitable. We currently rely on third parties such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist us with our pre-clinical and clinical trials. For example, we currently rely on Virtus Clinical Development (Pty) Limited in relation to regulatory matters, clinical trial management and all other clinical services related to our research and development of NK-001, and specifically with respect to our 50 patient randomized clinical trials we plan to conduct in South Africa. To that effect, we have entered into a Clinical Trial Services Master Agreement with Virtus dated March 1, 2009. In carrying out such trials, we are required to comply with various regulations and standards, commonly referred to as good clinical practices, regarding conducting, recording and reporting to ensure that data and results are credible and accurate and that the trial participants are adequately protected. If the third parties on whom we rely do not successfully perform their duties or meet regulatory obligations or expected deadlines, or if they need to be replaced or the quality or accuracy of the data they obtain is compromised, our development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates. This could prevent us from becoming profitable. If we are unable to establish a sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these functions, we may not be successful in commercializing our product candidates. This could cause us to cease our operations. In order to successfully commercialize any of our product candidates, we must either develop a satisfactory sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these services for us. We will require substantial resources to create such an infrastructure, and we may never possess the resources to do so. For example, we may be unable to recruit and retain an adequate number of effective sales and marketing personnel or we may incur unforeseen costs and expenses in connection with developing the necessary infrastructure. Although we plan to develop our own sales and marketing organizations in some markets, we intend to enter into partnering, co-promotion and other distribution arrangements to commercialize our products in most markets. We may not be able to enter into collaborations on acceptable terms, if at all, and we may face competition in our search for partners with whom we may collaborate. If we are not able to build a satisfactory sales, marketing and distribution infrastructure or collaborate with one or more partners to perform these functions, we may not be able to successfully commercialize our product candidates, which could cause us to cease our operations. Our product candidates may never gain market acceptance even if we obtain the necessary regulatory approvals, which could prevent us from generating revenues. Even if we receive the necessary regulatory approvals to commercially sell our product candidates, the success of these candidates will depend on their acceptance by physicians and patients, among other things. Market acceptance of, and demand for, any product that we develop and commercialize will depend on many factors, including: our ability to provide acceptable evidence of safety and efficacy; our ability to obtain sufficient third-party insurance coverage or reimbursement; the availability, relative cost and relative efficacy of alternative and competing treatments; the effectiveness of our or our collaborators sales, marketing and distribution strategy; and publicity concerning our products or competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to generate sufficient revenue to continue our business. We will depend on other parties to manufacture our product candidates. If these parties fail to meet our manufacturing requirements and applicable regulatory requirements, our product development and commercialization efforts could suffer and we may never realize a profit. If we obtain the necessary regulatory approvals to market our products, we will rely on contract manufacturers as single source suppliers for the components of our product candidates. Both our product candidates are based (either entirely, as with NK-001, or partially, as with NK-002) upon existing generic drugs and therefore we do not anticipate having to obtain those products from their original developers. However, we will rely on manufacturers with expertise in producing certain generic drugs and other components and we do not plan to enter into long-term supply agreements with any of these manufacturers. As a result, any of them could terminate their relationship with us at any time and for any reason. Because of our planned reliance on contract manufacturers, we may also be exposed to additional risks, including those related to intellectual property and the failure of such manufacturers to comply with strictly-enforced regulatory requirements, manufacture components to our specifications, or deliver sufficient component quantities to us in a timely manner. For example, a contract manufacturer working on our behalf may violate the intellectual property rights of a third party in manufacturing a component of one of our products, and if such a violation occurs without our knowledge, we may be held vicariously liable for the acts of our contractor, incur related costs and court mandated damages, or become enjoined from selling products which violate those third-party intellectual property rights. Similarly, if a contract manufacturer working on our behalf is found to be in violation of FDA or other national regulatory standards regarding the manufacture, packaging or labeling of any of our products, we could face any of a number of adverse consequences including costly regulatory investigations and fines, interruptions in the flow of our products or materials, product recalls, or liability to consumers regarding any of our products that do not meet such regulatory requirements. If any of these events occurs, if our relationship with any of our potential contract manufacturers terminates, or if any such manufacturer is unable fulfill its obligations to us for any reason, our product development and commercialization efforts could suffer and we may never realize a profit. We face potential product liability exposure, and any claim brought against us may cause us to divert resources from our normal operations or terminate selling, distributing and marketing any product for which we have received regulatory approval. This may cause us to cease our operations. The use of our product candidates in clinical trials and the sale of any products for which we obtain regulatory approval may expose us to product liability claims from consumers, health care providers, pharmaceutical companies or other entities. Although we plan to obtain product liability insurance coverage for our clinical trials with limits that we hope will be customary and adequate to provide us with coverage for foreseeable risks associated with our product development efforts, our insurance coverage may be insufficient to reimburse us for the actual expenses or losses we may suffer. To date, we have received a comfort letter from the insurer Marsh Inc. stating that our planned clinical trials of NK-001 are eligible for customary insurance subject to the approval of our clinical trial protocol by the requisite health authorities. If we obtain sufficient financing to proceed with our planned clinical trials, we intend to purchase insurance in amounts customary for trials comparable to our own. To that effect, we intend to consult with industry professionals to determine the optimal amount of coverage. In order to obtain insurance, we must subject our clinical trial protocol to a full review by our eventual insurance provider. The process of binding an insurance policy for a clinical trial can take as long as three months. We also plan to expand our insurance to cover the commercial sale of products if we obtain the necessary regulatory approval to do so; however, the same product liability risks apply in those circumstances as in clinical trials. Further, even if we are able to successfully defend ourselves against any potential claims, we will likely incur substantial costs in the form of unanticipated expenses and negative publicity. This could result in decreased demand for our product candidates, the withdrawal of clinical trial participants, an impaired business reputation, revenue loss or an inability to commercialize our product candidates. Any of these consequences could cause us to cease our operations. We face substantial competition in the therapeutic pharmaceutical research and development industry, which could harm our business and our ability to operate profitably. Our industry is highly competitive, and many of our potential competitors, either alone or together with their partners, have substantially greater financial resources, research and development programs, clinical trial and regulatory experience, expertise in the protection of intellectual property rights, and manufacturing, distribution and sales and marketing capabilities than us. As a result, they may be able to: develop product candidates and market products that are less expensive, safer, more effective or involve more convenient treatment procedures than our future products; commercialize competing products before we can launch any of our product candidates; initiate or withstand substantial price competition more successfully than us; enjoy greater success in recruiting skilled scientific workers from a limited pool of available talent; more effectively negotiate third-party licenses and strategic alliances; and take advantage of acquisition or other opportunities more readily than us. We are not currently aware of any active NK-001 competitors for the treatment of post-coronary artery bypass graft cognitive impairment, nor are we aware of any active competitors seeking to develop a novel encapsulation similar to NK-002, despite the widespread the study of Etanercept as a treatment for Alzheimer s disease. If we are unable to maintain a competitive advantage in our industry in the face of rapid technological change, our business could be harmed and we may not be able to operate profitably. All of our product candidates and product development processes will be subject to ongoing regulatory requirements, and may therefore be the subject of regulatory or enforcement action. The associated costs could prevent us from achieving our goals or becoming profitable. Our product candidates, clinical data, third-party manufacturing facilities and processes and advertising and promotional activities for any product that receives regulatory approval will be subject to significant review and ongoing and changing regulation by various regulatory agencies. Our failure to comply with any regulatory requirements may subject us to administrative and judicial sanctions, which may include warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production, or the denial of pending product marketing applications. Even if we receive regulatory approval to market a particular product candidate, such approval could be conditional upon our conducting costly post-approval studies or could limit the indicated uses that we are able to include on our product labels. In addition, regulatory or enforcement actions could adversely affect our ability to develop, market and sell our prospective products successfully and harm our reputation, which could lead to reduced market demand for such products. Consequently, the costs associated with any such action could cause our business to suffer and prevent us from achieving our goals or becoming profitable. We depend on our key personnel to carry out our business plan. If we are not able to retain such key personnel our financial condition and results of operations could suffer, and we may not be able to operate profitably. We are highly dependent on the principal members of our management and scientific staff to carry out our business plan. For example, we are highly dependent on Dr. Ahmad Doroudian, our President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director for all aspects of our operations, including product development, general management and finance. We have not entered into any employment or consulting agreement with Dr. Doroudian regarding his services to us. To a lesser extent, we intend to rely on certain of our directors to contribute their expertise to our ongoing corporate and research development, such as Dr. Kamran Shojania for his expertise in the treatment of diseases mediated by acute and chronic inflammation in relation to our development of NK-001 and NK-002, and Dr. Maziar Badii for his expertise in musculoskleletal and spinal research in relation to our development of future products in that field. We have entered into consulting agreements with Drs. Shojania and Badii that provide for one year terms of service ending on July 13, 2010, with an option to renew at our discretion. These agreements may be terminated without cause by either party with seven days notice. Competition for skilled personnel among biopharmaceutical companies is intense and the employment services of our scientific, management and other executive officers are terminable at-will. For example, our former Chief Scientific Officer and former Director, Jonathan Willmer, recently resigned in order to assume an executive position at a major multinational pharmaceutical company. Replacing key employees or independent contractors may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. If we lose one or more of these key employees or independent contractors, our financial condition and results of operations could suffer, and we may not be able to operate profitably. Since all of our officers, directors and many business assets are located in Canada, you may be limited in your ability to enforce U.S. civil actions against them for damages to the value of your investment. Many of our business assets are located in Canada and all of our officers and directors are residents of Canada. Consequently, if you are a U.S. investor it may be difficult for you to affect service of process on our officers and directors within the United States or enforce a civil judgment of a U.S. court in Canada if a Canadian court determines that the U.S. court in which the judgment was obtained did not have jurisdiction in the matter. There is also substantial doubt whether an original action predicated solely upon civil liability may successfully be brought in Canada against any of our officers, directors or business assets. As a result, you may not be able to recover damages as compensation for any decline in the value of your investment. We may indemnify our directors and officers against liability to us and our security holders, and such indemnification could increase our operating costs. Our Articles allow us to indemnify our directors and officers against claims associated with carrying out the duties of their offices. Our Articles also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the Securities Act ) may be permitted to our directors, officers or control persons, we have been advised by the SEC that such indemnification is against public policy and is therefore unenforceable. Since our officers and directors are aware that they may be indemnified for carrying out the duties of their offices, they may be less motivated to meet the standards required by law to properly carry out such duties, which could increase our operating costs. Further, if our officers and directors file a claim against us for indemnification, the associated expenses could also increase our operating costs. Our officers, directors, consultants and advisors are not obligated to commit their time and attention exclusively to our business and therefore they may encounter conflicts of interest with respect to the allocation of time and business opportunities between our operations and those of other businesses. Our directors are not obligated to commit their time and attention exclusively to our business and, accordingly, they may encounter conflicts of interest in allocating their own time, or any business opportunities which they may encounter, between our operations and those of other businesses. Dr. Ahmad Doroudian, our President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director, is also the President and Chief Executive Officer of Rayan Pharma Inc., a private manufacturer of pharmaceutical preparations, and the President and Chief Executive Officer of Merus Labs Inc., a specialty pharmaceutical company engaged in the acquisition and licensing of pharmaceutical products. Penny Green, our Vice President of Corporate Finance, Secretary and Director, is also the Chief Financial Officer and Vice President, Corporate Affairs, of Merus Labs Inc. and the managing attorney of Bacchus Law Corporation. Dr. Kamran Shojania, our Director, conducts independent research with a variety of academic and non-academic organizations regarding the efficacy of different medications on the treatment of diseases mediated by acute and chronic inflammation, including rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis. Similarly, Dr. Maziar Badii, our Director, conducts musculoskleletal and spinal research on behalf of various academic and non-academic organizations. Currently, Dr. Ahmad Doroudian, our President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director, and Penny Green, our Vice President of Corporate Finance, Secretary and Director, each commit between 10 and 20 hours per week to our business in their capacities as officers and directors. Our other directors, Dr. Maziar Badii, Dr. Kamran Shojania and Bruce Pridmore, devote their time to us on an as-needed basis. Nevertheless, if the execution of our business plan demands more time than is currently committed by any of our officers, directors, consultants or advisors, they will be under no obligation to commit such additional time, and their failure to do so may adversely affect our ability to carry on our business and successfully execute our business plan. Additionally, all of our officers and directors, in the course of their other business activities, may become aware of investment, business or research opportunities or information which may be appropriate for presentation to us as well as to other entities to which they owe a fiduciary duty. They may also in the future become affiliated with entities that are engaged in business or research activities similar to those we intend to conduct. As a result, they may have conflicts of interest in determining to which entity particular opportunities or information should be presented. If, as a result of such conflict, we are deprived of investment, business or research opportunities or information, the execution of our business plan and our ability to effectively compete in the marketplace may be adversely affected. Risks Related to Our Intellectual Property If we are unable to maintain and enforce our proprietary intellectual property rights, we may not be able to operate profitably. Our commercial success will depend, in part, on obtaining and maintaining patent protection, trade secret protection and regulatory protection of our technologies and product candidates as well as successfully defending third-party challenges to such technologies and candidates. We will be able to protect our technologies and product candidates from use by third parties only to the extent that valid and enforceable patents, trade secrets or regulatory protection cover them and we have exclusive rights to use them. The ability of our licensors, collaborators and suppliers to maintain their patent rights against third-party challenges to their validity, scope or enforceability will also play an important role in determining our future. In addition, our commercial success will depend, in part, on maintaining patent rights we have licensed or plan to license related to products we may market in the future. Since we will not fully control the patent prosecution of any licensed patent applications, it is possible that our licensors will not devote the same resources or attention to the prosecution of the licensed patent applications as we would if we controlled the prosecution of the applications ourselves. Consequently, the resulting patent protection, if any, may not be as strong or comprehensive as it would be had we done so. The patent positions of biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions that include unresolved principles and issues. No consistent policy regarding the breadth of claims allowed regarding such companies patents has emerged to date in the United States, and the patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict with any certainty the range of claims that may be allowed or enforced concerning our patents or third-party patents. We also rely on trade secrets to protect our technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we seek to protect confidential information, in part, through confidentiality agreements with our consultants and scientific and other advisors, they may unintentionally or wilfully disclose our information to competitors. Enforcing a claim against a third party related to the illegal acquisition and use of trade secrets can be expensive and time consuming, and the outcome is often unpredictable. If we are not able to maintain patent or trade secret protection on our technologies and product candidates, then we may not be able to exclude competitors from developing or marketing competing products, and we may not be able to operate profitability. If we are the subject of an intellectual property infringement claim, the cost of participating in any litigation could cause us to go out of business. There has been, and we believe that there will continue to be, significant litigation and demands for licenses in our industry regarding patent and other intellectual property rights. Although we anticipate having a valid defense to any allegation that our current product candidates, production methods and other activities infringe the valid and enforceable intellectual property rights of any third parties, we cannot be certain that a third party will not challenge our position in the future. Other parties may own patent rights that we might infringe with our products or other activities, and our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. These parties could bring claims against us that would cause us to incur substantial litigation expenses and, if successful, may require us to pay substantial damages. Some of our potential competitors may be better able to sustain the costs of complex patent litigation, and depending on the circumstances, we could be forced to stop or delay our research, development, manufacturing or sales activities. Any of these costs could cause us to go out of business. We may in the future be required to license patent rights from third-party owners in order to develop our products candidates. If we cannot obtain those licenses or if third-party owners do not properly maintain or enforce the patents underlying such licenses, we may not be able to market or sell our planned products. Although we are not currently dependent on any third-party intellectual property rights to execute our research and development activities, we plan to license patent-protected technologies and other intellectual property if we believe it is necessary or useful to use third-party intellectual property to develop our products, or if our product development threatens to infringe upon the intellectual property rights of third parties. Typically, we would seek to negotiate and obtain any required third party licenses immediately following the completion of preliminary research to establish a concept and plan of development for a new product candidate. However, depending on the ongoing results and requirements of pre-clinical or clinical trials, which may unexpectedly vary from our anticipated plan of development, we may be required to seek additional third-party licenses at later stages of product development. We may be required to pay license fees or royalties or both to obtain such licenses, and there is no guarantee that such licenses will be available on acceptable terms, if at all. Even if we are able to successfully obtain a license, the rights may be non-exclusive, and this would give our competitors access to the same intellectual property as us, which could ultimately prevent us from commercializing a product. Should we succeed in obtaining a license, our business prospects will depend, in part, on the ability of our licensors to obtain, maintain and enforce patent protection on our licensed intellectual property. Our licensors may terminate our license, may not pursue and successfully prosecute any potential patent infringement claim, may fail to maintain their patent applications, or may pursue any litigation less aggressively than we would. Without protection for the intellectual property that we license, other companies may be able to offer substantially similar products for sale, and we may not be able to market or sell our planned products or generate any revenues. Certain third-party intellectual property rights from which we currently benefit are licensed to us on a non-exclusive basis, which could ultimately place us at a competitive disadvantage or prevent us from commercializing our product candidates. On June 17, 2008 we entered into a non-exclusive License Agreement with Globe Laboratories Inc., a company founded and controlled by Julian Salari, our former President, former Secretary and former Director, to acquire the right to use Globe s know-how to produce certain drugs known as protein therapeutics which form the basis of our products. For example, Globe s intellectual property provides us with a method to produce Etanercept, the generic protein therapeutic drug that forms the basis of NK-001 and NK-002. Because our license from Globe is non-exclusive, Globe is free to license identical intellectual property to third parties, including those that may directly compete with us in our field of development. Although the intellectual property provided to us by Globe allows us to produce generic products that are generally available from a number of suppliers, we believe that Globe s method for producing these products is currently qualitatively superior and more cost-effective than most alternative means of producing or obtaining them. If Globe licenses its proprietary method to our competitors, we will lose what we believe to be a competitive advantage, the loss of which may make us vulnerable to increased competition and hinder or ultimately prevent us from commercializing our product candidates. If we fail to comply with our obligations under our non-exclusive License Agreement with Globe Laboratories Inc. or any other license or related agreements to which we are a party or that we may enter into in the future, we could lose license rights that may be necessary to or greatly assist us in developing our therapeutic products. Under the terms of our non-exclusive License Agreement with Globe Laboratories Inc., we were obligated to remit CAD$500,000 to Globe, comprised of a non-refundable license fee of USD$150,000 (including CAD$50,000 in respect of patent preparation and filing fees) and a one-time royalty payment of CAD$350,000. In June 2008, we settled our obligation to Globe by issuing Globe 2,000,000 shares of our common stock and we no longer have any enduring financial obligation to Globe. We do, however, have an ongoing obligation to Globe to use our best efforts to commercialize products based on its intellectual property and to indemnify it from any third-party claims resulting from our use of its intellectual property. In addition, Globe has the right under this license to license the same intellectual property to our competitors for similar purposes. Similar to the non-exclusive license granted to us by Globe, any license agreement that we may enter into in the future in connection with our efforts to develop drugs may impose various development, commercialization, funding, royalty, diligence, sublicensing, insurance and other obligations on us. If we breach any material obligations, such as the obligation to protect the confidentiality of the intellectual property under license, the licensor may have the right to terminate the license which could prevent us from developing, manufacturing and selling products that are covered by the licensed technology or permit a competitor to access the licensed technology. Under the terms of our non- exclusive License Agreement with Globe, Globe has the right to terminate our license in the event that we become bankrupt or insolvent, or if our business is placed in the hands of a receiver, assignee or trustee. In addition, Globe has the right to terminate our license if we default on any of the clauses of the License Agreement and fail to remedy such defaults within 90 days of Globe providing notice to us of such default along with its intent to terminate. Because our License Agreement with Globe allows us to access generic drugs required to develop our products that are widely available, we do not strictly rely on our license from Globe to conduct our research and development activities. However, because intellectual property licensed to us by Globe allows us to produce high quality generic drugs at relatively low cost, the loss of our license with Globe would cause us to lose a competitive advantage. If the FDA grants one of our competitors an orphan drug designation for a drug and indication combination that is identical to the drug and indication combination used and targeted by one of our products, we will prevented from marketing that product for seven years. The FDA may grant an orphan drug designation to a drug intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States. An orphan drug designation must be requested before a sponsor submits a New Drug Application to the FDA, and if the FDA grants such a designation the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. An orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process that a drug must undergo; however, if a product that is the subject of an orphan drug designation subsequently receives FDA approval for the indication for which it has such a designation, the product is entitled to orphan exclusivity for up to seven years after receiving FDA approval. This means that the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances. Therefore, if one of our competitors obtains an orphan drug designation for a drug and indication combination that is identical to the drug and indication combination of one of our products (i.e. the same underlying drug applied to the same indication), our product may not be approved for the same indication for up to seven subsequent years. Risks Associated with Our Securities Because there is no public trading market for our common stock, you may not be able to resell your shares. There is currently no public trading market for our common stock. Therefore, there is no central place, such as stock exchange or electronic trading system, to resell your shares. If you do wish to resell your shares, you will have to locate a buyer and negotiate your own sale. As a result, you may be unable to sell your shares, or you may be forced to sell them at a loss. We have applied to have our common stock quoted on the OTC Bulletin Board. As of the date of this registration statement, our common stock has not been approved for quotation on the OTC Bulletin Board. The quotation of our common stock on the OTC Bulletin Board is subject to the approval of a Form 211 Listing Application regarding our common stock by the Financial Industry Regulation Authority (FINRA). In September 2009, Spartan Securities Group, Ltd. submitted a Form 211 Listing Application to FINRA on our behalf as a market maker. FINRA approval of the Form 211 Listing Application remains subject to this registration statement being declared effective by the SEC. We cannot obtain listing of our shares of common stock on the OTC Bulletin Board until this registration statement is declared effective by the SEC and the Form 211 Listing Application is approved by FINRA. There can be no assurance that this registration statement will be declared effective by the SEC or that the Form 211 Listing Application will be approved by FINRA. If our common stock becomes listed and a market for the stock develops, the actual price of our shares will be determined by prevailing market prices at the time of the sale. We cannot assure you, however, that there will be a market in the future for our common stock. The trading of securities on the OTC Bulletin Board is often sporadic and investors may have difficulty buying and selling our shares or obtaining market quotations for them, which may have a negative effect on the market price of our common stock. You may not be able to sell your shares at their purchase price or at any price at all. Accordingly, you may have difficulty reselling any shares you purchase from the selling security holders. Purchase in this offering may receive an illiquid security. You will experience dilution or subordinated stockholder rights, privileges and preferences as a result of our financing efforts. We must raise additional capital from external sources to carry out our business plan over the next 12 months. To do so, we may issue debt securities, equity securities or a combination of these securities; however, we may not be able to sell these securities, particularly under current market conditions. Even if we are successful in finding buyers for our securities, such buyers could demand high interest rates or require us to agree to onerous operating covenants, which could in turn harm our ability to operate our business by reducing our cash flow and restricting our operating activities. If we choose to sell shares of our common stock, this will result in dilution to our existing stockholders. In addition, any shares of common stock we may issue may have rights, privileges and preferences superior to those of our current stockholders. We do not intend to pay dividends and there will thus be fewer ways in which you are able to make a gain on your investment, if at all. We have never paid dividends and do not intend to pay any dividends for the foreseeable future. To the extent that we may require additional funding currently not provided for in our financing plan, our funding sources may prohibit the declaration of dividends. Because we do not intend to pay dividends, any gain on your investment will need to result from an appreciation in the price of our common stock. There will therefore be fewer ways in which you are able to make a gain on your investment, if at all. There is also no guarantee that your investment will appreciate. Because the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment to decline. Our shares are classified as penny stocks and are covered by section 15(g) of the Exchange Act, which imposes additional sales practice requirements on broker-dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement from you prior to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline. FINRA sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares. FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and depress our share price. You may face significant restrictions on the resale of your shares due to state blue sky laws. Each state has its own securities laws, often called blue sky laws, which (1) limit sales of securities to a state s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration or qualification.

parsed_sections/risk_factors/2010/BSBR_banco_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS You should carefully consider the risks described below, as well as the other information in this prospectus, before deciding to purchase our Units and ADSs. Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our Units and the American Depositary Shares ( ADSs ) could decline, and you could lose all or part of your investment. We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, together with Brazil s political and economic conditions, could adversely affect our financial condition and the market price of our securities. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policies and regulations. The Brazilian government s actions to control inflation and other policies and regulations historically have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency fluctuations, capital controls and limits on imports. Our business, financial condition and results of operations, as well as the market price of our securities, may be adversely affected by changes in policies or regulations involving, among others: interest rates; exchange rates and controls and restrictions on the movement of capital out of Brazil (such as those briefly imposed in 1989 and early 1990); currency fluctuations; inflation; liquidity of the domestic capital and lending markets; and tax and regulatory policies. Although the Brazilian government has implemented sound economic policies over the past few years, uncertainty over whether the Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and in the securities issued abroad by Brazilian issuers. These uncertainties and other developments in the Brazilian economy may adversely affect us and the market value of our securities. Government efforts to control inflation may hinder the growth of the Brazilian economy and could harm our business. Brazil has experienced extremely high rates of inflation in the past and has therefore implemented monetary policies that have resulted in one of the highest interest rates in the world. Inflation and the Brazilian government s measures to fight it, principally through the Central Bank, have had and may in the future have significant effects on the Brazilian economy and our business. Tight monetary policies with high interest rates and high compulsory deposit requirements may restrict Brazil s growth and the availability of credit, reduce our loan volumes and increase our loan loss provisions. Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our interest rate spreads. Since 2001, the Central Bank has adjusted the base interest rate on a regular basis. The Central Bank reduced the base interest rate during the second half of 2003 and the first half of 2004. In order to control inflation, the Central Bank increased the base interest rate several times from 16.0% per annum on August 18, 2004 to 19.75% on Table of Contents May 18, 2005. During the following two years, favorable macroeconomic figures and controlled inflation within the Central Bank target range led the Central Bank to lower the base interest rate several times from 18.0% in December of 2005 to 11.25% in September of 2007. In April and June of 2008, however, the Central Bank increased the base interest rate by 0.5% to 12.25%, due to the macroeconomic conditions and the expectations of inflation in 2008. In July 2009, the Central Bank reduced the base interest rate to 8.75% in order to encourage an increase in the availability of credit. The rate remained at 8.75% until April 28, 2010, when the Central Bank increased it to 9.50%. On June 9, 2010, the rate was increased again by the Central Bank to 10.25% and on July 21, 2010 it was increased to 10.75%. As a bank in Brazil, the vast majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations. Although increases in the base interest rate typically enable us to increase financial margins, such increases could adversely affect our results of operations by, among other things, reducing demand for our credit and investment products, increasing our cost of funds and increasing the risk of customer default. Decreases in the base interest rate could also adversely affect our results of operations by, among other things, decreasing the interest income we earn on our interest-earning assets and lowering margins. Exchange rate instability may have a material adverse effect on the Brazilian economy and on us. The Brazilian currency has during the past decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching a selling exchange rate of R$3.53 per U.S.$1.00 at the end of 2002. Between 2003 and mid-2008, the real appreciated significantly against the U.S. dollar due to the stabilization of the macroeconomic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.559 per U.S.$1.00 in August 2008. As a result of the crisis in the global financial markets since mid-2008, the real depreciated 31.9% against the U.S. dollar over the course of 2008 and reached R$2.337 per U.S.$1.00 on December 31, 2008. The real recovered in the second half of 2009, reaching R$1.7412 per U.S.$1.00 on December 31, 2009, mainly due to the recovery of consumer confidence, export and foreign investments in the second half of the year. On April 30, 2010, the exchange rate was R$1.7306 per U.S.$1.00. Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations. Additionally, depreciation of the real could make our foreign currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios and have similar consequences for our borrowers. Conversely, appreciation of the real relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange currency accounts, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations. Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect our access to financing and the market price of our securities. The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States and other Latin American and emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investors reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities. This could adversely affect the market price of our securities, restrict our access to the capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all. In addition, the global financial crisis has had significant consequences in Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates, among others, which may, directly or indirectly, adversely affect us and the market price of our Units. Table of Contents Risks Relating to the Brazilian Financial Services Industry We are exposed to the effects of the disruptions and volatility in the global financial markets and the economies in those countries where we do business, especially Brazil. The financial global markets have deteriorated sharply since the end of 2007. Major financial institutions, including some of the largest global commercial banks, investment banks and insurance companies have been experiencing significant difficulties, especially lack of liquidity and depreciation of financial assets. These difficulties have constricted the ability of a number of major global financial institutions to engage in further lending activity and have caused losses. In addition, defaults by, and doubts about the solvency of certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by, and bankruptcies of, other institutions. We are exposed to the disruptions and volatility in the global financial markets because of their effects on the financial and economic environment in the countries in which we operate, especially Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability. We lend primarily to Brazilian borrowers, and these effects could materially and adversely affect our customers and increase our nonperforming loans, resulting in increased risk associated with our lending activity and requiring us to make corresponding revisions to our risk management and loan loss reserve models. For example, in 2009, we experienced an increase in our nonperforming loans overdue above 90 days from 5.4% of total loans on December 31, 2008 to 7.2% on December 31, 2009. The global financial downturn has had significant consequences for Brazil and other countries in which we operate, including stock, interest and credit market volatility, a general economic slowdown, and volatile exchange rates that may, directly or indirectly, adversely affect the market price of Brazilian securities and have a material adverse effect on us. In addition, institutional failures and disruption of the financial markets in Brazil and the other countries in which we operate could restrict our access to the public equity and debt markets. Continued or worsening disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil and the other countries in which we operate, which could have a material adverse effect on us. Changes in regulation may negatively affect us. Brazilian financial markets are subject to extensive and continuous regulatory review by the Brazilian government, principally by the Central Bank and the CVM. We have no control over government regulations, which govern all aspects of our operations, including regulations that impose: minimum capital requirements; compulsory deposit and/or reserve requirements; requirements for investments in fixed rate assets; lending limits and other credit restrictions, including compulsory allocations; limits and other restrictions on fees; limits on the amount of interest banks can charge or the period for capitalizing interest; accounting and statistical requirements; and other requirements or limitations in the context of the global financial crisis. The regulatory structure governing Brazilian financial institutions is continuously evolving, and the Central Bank has been known to react actively and extensively to developments in our industry. For example, in early 2008, the Central Bank created a compulsory deposit requirement on interbank deposits from leasing companies. This had Table of Contents an adverse effect on our cost of funding because our leasing company invests most of its available cash in interbank deposits with us. In February 2010, the Central Bank increased compulsory deposits to the levels which were in place before the deterioration of the markets in 2008. The measures of the Central Bank and the amendment of existing laws and regulations, or the adoption of new laws or regulations, could adversely affect our ability to provide loans, make investments or render certain financial services. Our securities and derivative financial instruments are subject to market price and liquidity variations due to changes in economic conditions and may produce material losses. Financial instruments and securities represent a significant amount of our total assets. Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income. These gains and losses, which we account for when we sell or mark-to-market investments in financial instruments, can vary considerably from one period to another. If, for example, we enter into derivatives transactions to protect ourselves against decreases in the value of the real or in interest rates and the real instead increases in value or interest rates increase, we may incur financial losses. We cannot forecast the amount of gains or losses in any future period, and the variations experienced from one period to another do not necessarily provide a meaningful forward-looking reference point. Gains or losses in our investment portfolio may create volatility in net revenue levels, and we may not earn a return on our consolidated investment portfolio, or on a part of the portfolio in the future. Any losses on our securities and derivative financial instruments could materially and adversely affect our operating income and financial condition. In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate. The increasingly competitive environment and recent consolidations in the Brazilian financial services market may adversely affect our business prospects. The Brazilian financial markets, including the banking, insurance and asset management sectors, are highly competitive. We face significant competition in all of our principal areas of operation from other large Brazilian and international banks, both public and private, and insurance companies. In recent years, the presence of foreign banks and insurance companies in Brazil has grown, and competition in the banking and insurance sectors and in markets for specific products has increased, including an increase in competition from Brazilian public banks. Since the beginning of 2009, public banks in Brazil have been aggressively increasing loan volumes at spreads lower than those of private banks. As a consequence, the market share of public banks has increased relative to the market share of private banks, which may negatively affect our results. The acquisition of an insurance company or a bank by one of our competitors would likely increase such competitor s market share and customer base, and, as a result, we may face heightened competition. An increase in competition may negatively affect our business results and prospects by, among other things: limiting our ability to increase our customer base and expand our operations; reducing our profit margins on the banking, insurance, leasing and other services and products we offer; and increasing competition for investment opportunities. We may experience increases in our level of past due loans as our loan portfolio matures. Our loan portfolio has grown substantially in recent years. Any corresponding rise in our level of past due loans may lag behind the rate of loan growth. Rapid loan growth may also reduce our ratio of past due loans to total loans until growth slows or the portfolio becomes more seasoned. This may result in increases in our loan loss provisions, charge-offs and the ratio of past due loans to total loans. In addition, as a result of the increase in our loan portfolio and the lag in any corresponding rise in our level of past due loans, our historic loan loss experience may not be indicative of our future loan loss experience. Our market, credit and operational risk management policies, procedures and methods may not be fully effective in mitigating our exposure to all risks, including unidentified or unanticipated risks. Our market and credit risk management policies, procedures and methods, including our use of value at risk, or VaR , and other statistical modeling tools, may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as negatively affect our revenues and profits. Table of Contents In addition, our businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, information systems failures or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures for mitigating operational risk proves to be inadequate or is circumvented. We have suffered losses from operational risk in the past, and there can be no assurance that we will not suffer material losses from operational risk in the future. We may fail to recognize the contemplated benefits of the acquisition of Banco Real. The value of the Units and ADSs could be adversely affected to the extent we fail to realize the benefits we hope to achieve from the integration of Santander Brasil and Banco Real, in particular, cost savings and revenue generation arising from the integration of the two banks operations. We may fail to realize these projected cost savings and revenue generation in the time frame we anticipate or at all due to a variety of factors, including our inability to carry out headcount reductions, the implementation of our firm culture and the integration of our back office operations or delays or obstacles in the integration of our information technology platform and operating systems. It is possible that the acquisition could result in the loss of key employees, the disruption of each bank s ongoing business and inconsistencies in standards, controls, procedures and policies and the dilution of brand recognition of the Santander and Banco Real brands. Moreover, the success of the acquisition will at least in part be subject to a number of political, economic and other factors that are beyond our control. If our reserves for future insurance policyholder benefits and claims are inadequate, we may be required to increase our reserves, which would adversely affect our results of operations and financial condition. Our insurance companies establish and carry reserves to pay future insurance policyholder benefits and claims. Our reserves do not represent an exact calculation of liability, but rather are actuarial or statistical estimates based on models that include many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including as to the levels of and/or timing of receipt or payment of premiums, benefits, claims, expenses, interest credits, investment results, retirement, mortality, morbidity and persistency. We cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits, claims and expenses or whether the assets supporting our insurance policy liabilities, together with future premiums, will be sufficient for payment of benefits and claims. If we conclude that our reserves, together with future premiums, are insufficient to cover future insurance policy benefits and claims, we would be required to increase our reserves in connection with our insurance business and incur income statement charges for the period in which we make the determination, which would adversely affect our results of operations and financial condition. The profitability of our insurance operations may decline if mortality rates, morbidity rates or persistency rates differ significantly from our pricing expectations. We set prices for many of our insurance and annuity products based upon expected claims and payment patterns, using assumptions for mortality rates, or likelihood of death, and morbidity rates, or likelihood of sickness, Table of Contents of our insurance policyholders. In addition to the potential effect of natural or man-made disasters, significant changes in mortality or morbidity could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, treatment patterns for disease or disability, or other factors. Pricing of our insurance and deferred annuity products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Results may also vary based on differences between actual and expected premium deposits and withdrawals for these products. Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our insurance products. Although some of our insurance products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability. Many of our insurance products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract. Our controlling shareholder has a great deal of influence over our business. Santander Spain, our controlling shareholder, currently owns, indirectly, approximately 84.1% of our total capital. Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to: elect a majority of our directors and appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries; agree to sell or otherwise transfer its controlling stake in our company; and determine the outcome of substantially all actions requiring shareholder approval, including transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends. The interests of Santander Spain may differ from our interests or those of our other shareholders, and the concentration of control in Santander Spain will limit other shareholders ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial. Risks Relating to Our Units and ADSs Cancellation of Units may have a material and adverse effect on the market for the Units and on the value of the Units. Holders of Units may present these Units or some of these Units for cancellation in Brazil in exchange for the common shares and preferred shares underlying these Units. If unit holders present a significant number of Units for cancellation in exchange for the underlying common shares and preferred shares, the liquidity and price of the Units may be materially and adversely affected. The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market prices of the Units and the ADSs. Although the Brazilian equity market is the largest in Latin America in terms of capitalization, it is smaller and less liquid than the major U.S. and European securities markets. The BM&FBOVESPA is significantly less liquid than the New York Stock Exchange (the NYSE ) or other major exchanges in the world. As of December 31, 2009, the aggregate market capitalization of the BM&FBOVESPA was equivalent to approximately R$2,331 billion (U.S.$1,337 billion) and the top ten stocks in terms of trading volume accounted for approximately 49.8% of all shares traded on BM&FBOVESPA in the year ended December 31, 2009. In contrast, as of December 31, 2009, the aggregate market capitalization of the NYSE was approximately U.S.$11.8 trillion. Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, government entities or a principal shareholder. The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the Units or ADSs at the time and price you desire and, as a result, could negatively impact the market price of these securities. Table of Contents Actual or anticipated sales of a substantial number of Units or our common shares or preferred shares in the future could decrease the market prices of the ADSs. Sales of a substantial number of our Units or our common shares or preferred shares in the future, or the anticipation of such sales, could negatively affect the market prices of our Units and ADSs. Currently, Santander Spain owns approximately 84.1% of our total capital. In connection with our listing on the BM&FBOVESPA, prior to October 7, 2012 (extendable under certain circumstances to October 7, 2014) Santander Brasil must have a public float that represents at least 25 percent of our total capital. If, in the future, substantial sales of Units or common shares or preferred shares are made by existing or future holders, the market prices of the ADSs may decrease significantly. As a result, holders of ADSs may not be able to sell their ADSs at or above the price they paid for them. The economic value of your investment may be diluted. We may, from time to time, need additional funds and, in the event that public or private financing is unavailable or if our shareholders decide, we may issue additional Units or shares. Any additional funds obtained by such a capital increase may dilute your interest in our company. Delisting of our shares from Level 2 of BM&FBOVESPA may negatively affect the price of our ADSs and Units. Companies listed on Level 2 of BM&FBOVESPA are required to have a public float of at least 25% of their outstanding shares. Currently, our public float is approximately 15.9% of our outstanding capital. We have a grace period of three years from the date of listing our shares on Level 2 of BM&FBOVESPA, extendable for an additional two years upon presentation of a plan to BM&FBOVESPA to comply with the minimum public float requirement. If we do not meet the minimum public float requirement, we may be subject to fines and eventually be delisted from Level 2 of BM&FBOVESPA and be traded at the regular level of BM&FBOVESPA. Level 2 regulations are also subject to change, and we may not be able to comply with such changes. Although such delisting could result in the obligation of the controlling shareholder to carry out a mandatory tender offer for the shares of the minority shareholders, such delisting may result in a decrease of the price of our shares, Units and ADSs. Holders of our Units and our ADSs may not receive any dividends or interest on shareholders equity. According to our by-laws, we must generally pay our common shareholders at least 25% of our annual net income as dividends or interest on shareholders equity, as calculated and adjusted under the Brazilian corporation law method, which may differ significantly from our net income as calculated under IFRS. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under the Brazilian corporation law method and may not be available to be paid as dividends or interest on shareholders equity. Additionally, the Brazilian corporation law allows a publicly traded company like ours to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. See Dividends and Dividend Policy . Holders of ADSs may find it difficult to exercise voting rights at our shareholders meetings. Holders of ADSs will not be direct shareholders of our company and will be unable to enforce directly the rights of shareholders under our by-laws and the Brazilian corporation law. Holders of ADSs may exercise voting rights with respect to the Units represented by ADSs only in accordance with the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. For example, we are required to publish a notice of our shareholders meetings in specified newspapers in Brazil. Holders of our Units will be able to exercise their voting rights by attending a shareholders meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders meeting by mail from the ADR depositary following our notice to the depositary requesting the depository to do so. To exercise their voting rights, holders of ADSs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADSs than for holders of our Units or shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADSs, Table of Contents the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances. Holders of ADSs also may not receive the voting materials in time to instruct the depositary to vote the Units underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the Units underlying their ADSs are not voted as requested. Holders of ADSs could be subject to Brazilian income tax on capital gains from sales of ADSs. Law No. 10,833 of December 29, 2003 provides that the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposition of our Units by a non-resident of Brazil to another non-resident of Brazil. It is unclear whether ADSs representing our Units, which are issued by the ADR depositary outside Brazil, will be deemed to be property located in Brazil for purposes of this law. There is no judicial guidance as to the application of Law No. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non-residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would accordingly impose withholding taxes on the disposition of our ADSs by a non-resident of Brazil to another non-resident of Brazil. See Taxation Brazilian Tax Considerations . Because any gain or loss recognized by a U.S. Holder (as defined in Taxation Material U.S. Federal Income Tax Considerations for U.S. Holders ) will generally be treated as a U.S. source gain or loss unless such credit can be applied (subject to applicable limitations) against tax due on the other income treated as derived from foreign sources, such U.S. Holder would not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our Units. Judgments of Brazilian courts with respect to our Units or ADSs will be payable only in reais. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the Units or ADSs, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations and according to Brazilian laws, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Central Bank or competent court, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the Units or ADSs. Holders of ADSs may be unable to exercise preemptive rights with respect to our Units underlying the ADSs. Holders of ADSs will be unable to exercise the preemptive rights relating to our Units underlying ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, ( Securities Act ), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of Units or ADSs. We may decide, in our discretion, not to file any such registration statement. If we do not file a registration statement or if we and the American Depositary Receipt ( ADR ) depository decide not to make preemptive rights available to holders of Units or ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse. Table of Contents

parsed_sections/risk_factors/2010/BWEN_broadwind_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained or incorporated by reference in this prospectus, including our consolidated financial statements and the related notes, before investing in our common stock. If any of the following risks materialize, our business, financial condition or results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. Risks Relating to Our Business and Our Industry Our businesses, and therefore our results of operations and financial condition, may continue to be adversely affected by dislocation in the global credit markets and economic uncertainty. The recent disruption in the global credit markets, the re-pricing of credit risk and the deterioration of the financial and real estate markets generally, particularly in the United States and Europe, have all contributed to a reduction in consumer spending and a contraction in global economic growth. Although initially impacting the housing, financial and insurance sectors, this deterioration further expanded into a significant recession affecting the general economy, including in the United States and throughout Europe, and other sectors, including the wind energy sector. The recession has had negative effects on demand for alternative sources of energy and consequently for our product and service offerings. Although there is a growing confidence that the global economies have resumed growth, there remains risk that the recovery will be short-lived, such recovery may not include the industries or markets in which we conduct our business, or the downturn may resume. In addition, because there is a long lead-time between orders for wind products and delivery, there is generally a lag before the impact of changed economic conditions affects our results, and an improvement in economic conditions in late 2009 would not be reflected in our results until at least the second quarter of 2010. Because of such lag, we expect revenues in the fourth quarter of 2009 to be significantly worse than the fourth quarter of 2008 and at a rate that is a higher year-over-year decrease than experienced during the three month period ended September 30, 2009. Any deterioration in economic conditions could have a material adverse effect on our business in a number of ways, including lower sales and renewal cycles if there is a reduction in demand for wind energy and could have a material adverse effect on our liquidity, results of operations and financial condition. In particular, risks we might face could include: potential declines in revenues in our business segments due to reduced orders or other factors caused by economic challenges faced by our customers and prospective customers, and an inability to finance future acquisitions or significant capital expenditures relating to new projects or lines of business on reasonable terms. The U.S. wind industry is reliant on tax and other economic incentives and political and governmental policies. A significant change in these incentives and policies could negatively impact our results of operations and growth. Our business segments are focused on supplying products and services to wind turbine manufacturers and owners and operators of wind energy generation facilities. Currently, the wind industry is dependent upon federal tax incentives and state renewable portfolio standards and would not be economically viable absent such incentives. The federal government provides economic incentives to the owners of wind energy facilities, including a federal production tax credit, an investment tax credit and a cash grant equal in value to the investment tax credit. The production tax credit was extended by the American Recovery and Reinvestment Act ("ARRA") in February 2009 and provides the owner of a qualifying wind energy facility placed in service before the end of 2012 with a ten-year tax credit against the owner's federal income tax obligations based on the amount of electricity generated by the qualifying wind energy facility and sold to unrelated third parties. Alternatively, wind Table of Contents project owners may (i) elect to receive an investment tax credit equal to 30% of the qualifying basis of facilities placed in service before the end of 2012 or (ii) for facilities placed in service in 2009 or 2010 (or, if construction begins before the end of 2010, placed in service before the end of 2012), apply to receive a cash grant from the Department of Treasury, equal in value to the investment tax credit. The production tax credit, investment tax credit and cash grant program provide material incentives to develop wind energy generation facilities and thereby impact the demand for our manufactured products and services. The increased demand for our products and services resulting from the credits and incentives may continue until such credits or incentives lapse. The failure of Congress to extend or renew these incentives beyond their current expiration dates could significantly delay the development of wind energy generation facilities and the demand for wind turbines, towers and related components. In addition, we cannot assure you that any subsequent extension or renewal of the production tax credit, investment tax credit or cash grant program would be enacted prior to its expiration or, if allowed to expire, that any extension or renewal enacted thereafter would be enacted with retroactive effect. It is possible that these federal incentives will not be extended beyond their current expiration dates. Any delay or failure to extend or renew the federal production tax credit, investment tax credit or cash grant program in the future could have a material adverse impact on our business, results of operations, financial performance and future development efforts. State renewable energy portfolio standards generally require state-regulated electric utilities to supply a certain proportion of electricity from renewable energy sources or devote a certain portion of their plant capacity to renewable energy generation. Typically, subject utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. Under many state standards, these renewable energy credits can be unbundled from their associated energy and traded in a market system allowing generators with insufficient credits to meet their applicable state mandate. These standards have spurred significant growth in the wind energy industry and a corresponding increase in the demand for our manufactured products. Currently, the majority of states and the District of Colombia have renewable energy portfolio standards in place and certain states have voluntary utility commitments to supply a specific percentage of their electricity from renewable sources. The enactment of renewable energy portfolio standards in additional states or any changes to existing renewable energy portfolio standards, or the enactment of a federal renewable energy portfolio standard or imposition of other greenhouse gas regulations may impact the demand for our products. We cannot assure you that government support for renewable energy will continue. The elimination of, or reduction in, state or federal government policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance and future development efforts. We could incur substantial costs to comply with environmental, health, and safety laws and regulations and to address violations of or liabilities under these requirements. Our operations and products are subject to a variety of environmental laws and regulations in the jurisdictions in which we operate and sell products governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous materials, soil and groundwater contamination, employee health and safety, and product content, performance and packaging. We cannot guarantee that we will at all times be in compliance with such laws and regulations and if we fail to comply with these laws and regulations or our permitting and other requirements, we may be required to pay fines, limit production at our facilities or be subject to other sanctions. Also, certain environmental laws can impose the entire or a portion of the cost of investigating and cleaning up a contaminated site, regardless of fault, upon any one or more of a number of parties, including the current or previous owner or operator of the site. These environmental laws also impose liability on any person who arranges for the disposal or treatment of hazardous substances at a contaminated site. Third parties may also make claims against owners or operators of sites and users of disposal sites for Table of Contents personal injuries and property damage associated with releases of hazardous substances from those sites. Many of our facilities have a history of industrial operations and contaminants have been detected at some of our facilities. Changes in existing environmental laws and regulations, or their application, could cause us to incur additional or unexpected costs to achieve or maintain compliance. Our facilities emit greenhouse gases which may be subject to pending or future environmental laws or regulations which could cause us to incur additional or unexpected costs to achieve and maintain compliance. The assertion of claims relating to on- or off-site contamination, the discovery of previously unknown environmental liabilities, or the imposition of unanticipated investigation or cleanup obligations, could result in potentially significant expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations. Our financial and operating performance is subject to certain factors which are out of our control, including prevailing economic conditions and the state of the wind energy market in North America. As a supplier of products and services to wind turbine manufacturers and owners and operators of wind energy generation facilities, our results of operations (like those of our customers) are subject to general economic conditions and specifically, to the state of the wind energy market. In addition to the state and federal government policies supporting renewable energy described above, the growth and development of the larger wind energy market in North America is subject to a number of factors, including, among other things: available financing for the estimated pipeline of wind development projects; the cost of electricity, which may be affected by a number of factors, including the cost and availability of fuel, government regulation, power transmission, seasonality and fluctuations in demand; the development of new power generating technology or advances of existing technology or discovery of power generating natural resources; the development of electrical transmission infrastructure; state and federal laws and regulations; administrative and legal challenges to proposed wind development projects; and public perception and localized community responses to wind energy projects. In addition, while some of the factors listed above may only affect individual wind project developments or portions of the market, in the aggregate they may have a significant effect on the successful development of the wind energy market, and thus, affect our operating and financial results. We are substantially dependent on a few significant customers. The wind turbine market in the United States is very concentrated, with eight manufacturers controlling in excess of 90% of the market. Like us, these customers have been adversely affected by the recent downturn in the economy and we have seen, and may continue to see, a decrease in order volume from such customers. During 2009, we have continued to be affected by the global economic downturn, particularly with respect to the economic impact that it continues to have on our customers. Historically, the majority of our revenues are highly concentrated with a limited number of customers. In 2008, three customers Gamesa, General Electric and Clipper Windpower each accounted for more than 10% of our consolidated revenues. During 2009, several of our customers expressed their intent to scale back, delay or restructure existing customer agreements, which has led to reduced Table of Contents revenues from these customers. As a result, our operating profits and gross margins have been negatively affected by a decline in production levels during 2009, which have created production volume inefficiencies in our operations and cost structures. Additionally, if our relationships with significant customers should change materially, it would be difficult for us to immediately and profitably replace lost sales in a market with such concentration, which would materially adversely affect our results. We could be adversely impacted by decreased customer demand for our products and services due to (1) the impact of current or future economic conditions on our customers, (2) our customers' loss of market share to competitors of theirs that do not use our products and (3) our loss of market share with our customers. We could lose market share with our customers to competitors or to our customers themselves, should they decide to become more vertically integrated and produce our products and services internally. Finally, most of our customers do not purchase all of our products and services, so if some of our customers gain market share, it could impact our mix of services and products among our segments. In addition, even if our customers continue to do business with us, we can be adversely affected by a number of other potential developments with our customers. For example: our customers may not comply with their contractual payment or volume obligations or may become subject to insolvency or liquidation proceedings. The inability or failure of our customers to meet their contractual obligations or the insolvency or liquidation of one or more of our significant customers could have a material adverse effect on our business, financial position and results of operations; our customers have, and in the future may seek to renegotiate the terms of current agreements or renewals; for example, some customers have sought payments from us for claims despite contractual limits that preclude our obligation to make payments for such claims; and although our subsidiary companies operate independently, a dispute between a significant customer and us or one of our subsidiaries could have a negative effect on the business relationship we have with that customer across our entire organization. Among other things, such a dispute could lead to an overall decrease in such customer's demand for our products and services or difficulty in collecting amounts due to one or more of our subsidiaries that are otherwise not related to such a dispute; and a material change in payment terms for accounts receivable of a significant customer could have a material adverse effect on our short-term cash flows. Our customers may be significantly affected by disruptions and volatility in the markets. Current market disruptions and regular market volatility may have adverse impacts on our customers' abilities to pay when due the amounts payable to us and could cause related increases in our cost of capital associated with any increased working capital or borrowing needs we may have if this occurs. We may also have difficulty collecting amounts payable to us in full (or at all) if any of our customers fail or seek protection under applicable bankruptcy or insolvency laws. In addition, our customers have in the past and may attempt in the future to renegotiate the terms of contracts or reduce the size of orders with us as a result of disruptions and volatility in the markets. Our backlog is substantial, but we cannot predict with any degree of certainty the amount of our backlog that we will be successful in collecting from our customers. Market disruptions and regular market volatility may also result in an increased likelihood of our customers bringing warranty or remediation claims in connection with our products or services that they would not ordinarily bring in a more stable economic environment. In the event of such a claim, we may incur costs if we decide to compensate the affected customer or to engage in litigation against the affected customer regarding the claim. We maintain product liability insurance, but there can be no Table of Contents guarantee that such insurance will be available or adequate to protect against such claims. A successful claim against us could result in a material adverse effect on our business. We may have difficulty raising additional financing when needed or on acceptable terms and there can be no assurances that our operations will generate sufficient cash flows in an amount sufficient to enable us to pay our indebtedness. We rely on access to both short- and long-term capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations. While we anticipate that our current cash resources and cash to be generated from this offering and our operations will be adequate to meet our liquidity needs for at least the next twelve months, following this offering, we will not have any significant committed sources of liquidity. If we are not able to access capital at competitive rates, the ability to implement our business plans may be adversely affected. In the absence of access to capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations at times when the prices for such assets are depressed. We may not be able to consummate those dispositions. Furthermore, these proceeds may not be adequate to meet our debt service obligations then due. Additionally, our ability to make scheduled payments on our existing or future debt obligations and fund operations will depend on our future financial and operating performance. While we believe that we will continue to have sufficient cash flows to operate our businesses, there can be no assurances that our operations will generate sufficient cash flows to enable us to pay our indebtedness or to fund our other liquidity needs. If we cannot make scheduled payments on our debt, we will be in default and, as a result, among other things, our debt holders could declare all outstanding principal and interest to be due and payable and we could be forced into bankruptcy or liquidation or required to substantially restructure or alter our business operations or debt obligations. Moreover, if we are unable to obtain additional capital or if our current sources of financing are reduced or unavailable, we will likely be required to delay, reduce the scope of or eliminate our plans for expansion and growth and this could affect our overall operations. Our current credit agreements limit our ability to take various actions, and a default under our credit agreements could have a material adverse impact on our business. While we currently anticipate using a portion of the net proceeds to us from this offering to repay our existing debt facilities with Bank of America, our current credit agreements limit our ability to take various actions, including paying dividends and disposing of assets. There can be no assurances that we will complete this offering or use proceeds to retire our existing debt facilities in full or, if these facilities with Bank of America are not retired, that we will remain in compliance with the covenants contained in the applicable loan agreements. If we fail to remain in compliance with the covenants contained in the applicable loan agreements, we would be in default on such loan agreements. The covenants, among other things, limit the manner in which we conduct our business and require us to satisfy specified financial and non-financial covenants. Accordingly, we may be restricted from taking actions that management believes would be desirable and in the best interests of us and our stockholders. Additionally, a breach of any covenants contained in our credit agreements could result in an event of default under the agreements. Upon the occurrence of an event of default under our credit agreements, the lenders may not be required to lend any additional amounts to us and could elect to declare all borrowings outstanding thereunder, together with accrued and unpaid interest and fees, to be due and payable, which could also trigger payment obligations under various guaranties securing certain of our borrowings, any of which could have a material adverse effect on our business or financial condition. For further information regarding our existing borrowings, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations Credit Facilities." Table of Contents Growth and diversification through acquisitions and internal expansion may not be successful, and could result in poor financial performance. To execute our business strategy, we may acquire new businesses. We may not be able to identify appropriate acquisition candidates or successfully negotiate, finance or integrate acquisitions. If we are unable to make acquisitions, we may be unable to realize the growth we anticipate. Future acquisitions could involve numerous risks including difficulties in integrating the operations, services, products, and personnel of the acquired business; and the potential loss of key employees, customers and suppliers of the acquired business. If we are unable to successfully manage these acquisition risks, future earnings may be adversely affected. We may also plan to continue to grow our existing business through increased production levels at existing facilities and through expansion to new manufacturing facilities and locations, such as our recently completed tower manufacturing facility in Abilene, Texas and our partially constructed tower manufacturing facility in Brandon, South Dakota. Such expansion and any future expansion will require coordinated efforts across the Company and continued enhancements to our current operating infrastructure, including management and operations personnel, systems and equipment, and property. Difficulties or delays in acquiring and effectively integrating any new facilities may adversely affect future performance. For example, we recorded higher costs in 2008 to handle a higher volume of orders and in 2009 in connection with the startup of production at our Abilene facility. Moreover, if our expansion efforts do not adequately predict the demand of our customers and our potential customers, our future earnings may be adversely affected. We face competition from industry participants who may have greater resources than we do. Our businesses are subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Many of our competitors and potential competitors may have substantially greater financial, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, location and available capacity. We cannot be sure that we will have the resources or expertise to compete successfully in the future. Some of our competitors may also be able to provide customers with additional benefits at lower overall costs to increase market share. We cannot be sure that we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition. In addition, we face competition from our customers as they seek to be more vertically integrated and offer full service packages. Some of our customers are also performing more services themselves. We have generated net losses and negative cash flows since our inception. We have experienced operating losses, as well as net losses, for each of the years during which we have operated. In addition in light of current economic conditions, we anticipate that losses and negative cash flow are possible for the foreseeable future. We have incurred significant costs in connection with the development of our businesses and there is no assurance that we will achieve sufficient revenues to offset anticipated operating costs. Although we anticipate deriving revenues from the sale of our products and services, no assurance can be given that these products can be sold on a net profit basis. If we achieve profitability, we cannot give any assurance that we would be able to sustain or increase profitability on a quarterly or annual basis in the future. Table of Contents We may not be able to effectively utilize the additional production capacity at our new wind tower manufacturing facility currently under construction in Brandon, South Dakota. We currently have a third wind tower manufacturing facility under construction on land that we own in Brandon, South Dakota. The terms of the construction financing require that construction of the facility be completed on or before March 5, 2010. If there is insufficient market demand for the products we intend to produce at this facility, it could be difficult or impossible for us to operate the facility in a profitable or cost-effective manner. If we elected not to commence operations of the facility we would continue to incur fixed costs associated with ownership of the facility, and there can be no assurance that we would be able to sell or otherwise dispose of the facility on terms deemed to be commercially reasonable by us if we sought to do so in the future. Our future operating results and the market price of our common stock could be materially adversely affected if we are required to write down the carrying value of goodwill or intangible assets associated with any of our operating segments in the future. We review our goodwill and intangible balances for impairment on at least an annual basis through the application of a fair-value-based test. Our estimate of fair-value for each of our operating segments is based primarily on projected future results and cash flows and other assumptions. In addition, we review long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In October of 2008, we performed our annual test for goodwill impairment and determined that the goodwill balance related to R.B.A. Inc. ("RBA"), a specialty industrial weldment business acquired by us in October 2007, was impaired. This determination indicated a decline in the projected fair value of RBA net assets based upon forecasted operating results. Our analysis indicated that the projected discounted cash flows associated with RBA's net assets did not exceed their carrying value. As a result, we recorded a goodwill impairment charge of approximately $2.4 million during the fourth quarter of 2008. In the future, if our projected discounted cash flows associated with our operating segments do not exceed the carrying value of their net assets, we may be required to record additional write downs of the carrying value of goodwill, intangible assets or other long-lived assets associated with any of our operating segments and our operating results and the market price of our common stock may be materially adversely affected. As of September 30, 2009 our goodwill and intangible balances were $34.0 million and $96.9 million respectively. We perform an annual goodwill impairment test during the fourth quarter of each year, or more frequently when events or circumstances indicate that the carrying value of our assets may not be recovered. The 2008-2009 recession has impacted our financial results and has reduced near-term purchases from certain of our key customers. We may determine that our expectations of future financial results and cash flows from one or more of our businesses has decreased or a decrease in stock valuation may occur, which could result in a review of our goodwill and intangible assets associated with these businesses. Since a large portion of the value of our intangibles has been ascribed to projected revenues from certain key customers, a change in our expectation of future cash from one or more of these customers could indicate potential impairment to the carrying value of our assets. Disruptions in the supply of parts and raw materials, or changes in supplier relations, may negatively impact our operating results. We are dependent upon the supply of certain raw materials used in our production process and these raw materials are exposed to price fluctuations on the open market. Raw material costs for items such as steel, the primary raw material used by us, have fluctuated significantly and may continue to fluctuate. To reduce price risk caused by market fluctuations, we have incorporated price adjustment clauses in many sales contracts. However, limitations on availability of raw materials or increases or decreases in the cost of raw materials (including steel), energy, transportation and other necessary Table of Contents As of September 30, 2009(3) Actual As Adjusted Selected Balance Sheet Data Assets: Cash and cash equivalents $ 7,660 $ 67,851 Total current assets 55,755 115,946 Total assets 328,329 388,520 Liabilities: Total current liabilities 55,414 48,050 Total long-term debt, net of current maturities 18,126 9,526 Total liabilities 81,103 65,139 Total stockholders' equity $ 247,226 $ 323,381 Table of Contents services may impact our operating results if our manufacturing businesses are not able to fully pass on the costs associated with such increases or decreases to their respective customers. Alternatively, we will not realize material improvements from declines in steel prices as the terms of many of our contracts provide that we pass through these costs to our customers. In addition, we may encounter supplier constraints, be unable to maintain favorable supplier arrangements and relations or be affected by disruptions in the supply chain caused by such events as natural disasters, power outages and the effect of labor strikes. In the event of significant increases or decreases in the price of raw materials, particularly steel, our margins and profitability could be negatively impacted. If our projections regarding the future market demand for our products are inaccurate, our operating results and our overall business may be adversely affected. We have made significant capital investments in anticipation of rapid growth in the wind energy market. The expansion of our internal manufacturing capabilities has required significant up-front fixed costs. If market demand for our products does not increase as quickly as we have anticipated and align with our expanded manufacturing capacity, we may be unable to offset these costs and to achieve economies of scale, and our operating results may be adversely affected as a result of high operating expenses, reduced margins and underutilization of capacity. Alternatively, if we experience rapid demand for our products in excess of our estimates, our installed capital equipment and existing workforce may be insufficient to support higher production volumes, which could harm our customer relationships and overall reputation. In addition, we may not be able to expand our workforce and operations in a timely manner, procure adequate resources, or locate suitable third-party suppliers, to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our business could be adversely affected. Our ability to meet such excess customer demand could also depend on our ability to raise additional capital and effectively scale our manufacturing operations. If our estimates for warranty expenses differ materially from actual claims made, or if we are unable to reasonably estimate future warranty expense for our products and services our business and financial results could be negatively affected. We provide warranty terms generally ranging between two and seven years to our tower and gearing customers depending upon the specific product and terms of the customer purchase agreement. We reserve for warranty claims based on industry experience and estimates made by management based upon a percentage of our product sales revenues. From time to time, customers have submitted warranty claims against the Company. However, we have a limited history on which to base our warranty estimates for certain products which we manufacture. Our assumptions could be materially different from the actual performance of our products in the future and could exceed the levels against which we have reserved. In some instances our customers have interpreted the scope and coverage of certain of our warranty provisions differently from the Company's interpretation of such provisions. The expenses associated with remediation activities in the wind energy industry can be substantial and if the Company is required to pay such costs in connection with a customer's warranty claim it could be subject to additional unplanned cash expenditures. If our estimates prove materially incorrect, or if we are required to cover remediation expenses in addition to our regular warranty coverage, we could be required to accrue additional expenses and could face a material unplanned cash expenditure, which could harm our financial and operating results. Table of Contents Material weaknesses or other deficiencies in our internal control over financial reporting, including potential failure to prevent or detect errors or fraud, could affect the accuracy of our reported financial results. Management identified material weaknesses in internal controls over financial reporting in 2008, relating to inventory and cost accounting, IT controls, income taxes and non-routine transactions, as referenced in Item 9A Controls and Procedures of our Annual Report on Form 10-K for the year ended December 31, 2008. We restated certain financial information in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 on account of certain material weaknesses in internal controls over our financial reporting. While we have taken steps to remediate these material weaknesses, we have not completed testing of our remediation actions and cannot assure you that these weaknesses are remediated. Because many of the remediation actions we have undertaken are recent and because some of our remediation actions will be designed to improve our internal controls over annual measures, management will not be able to conclude that the material weaknesses have been eliminated until such time as it is able to complete its assessment of the effectiveness of internal controls over financial reporting. While management is exercising its best efforts to remediate material weaknesses and significant deficiencies identified and described above, it cannot provide any assurance as to when such material weaknesses and significant deficiencies will be remediated, and other material weaknesses or significant deficiencies may arise. Internal control weaknesses or deficiencies may continue to affect our ability to close our financial reporting on a timely basis or report accurate numbers. In addition, acquisitions of companies lacking sufficient financial and internal control expertise may affect our ability to comply with public company reporting requirements in the future, including meeting filing deadlines established by the Securities and Exchange Commission (the "SEC"), and ensuring that our Company-wide controls and procedures are adequate to provide financial information in a timely and reliable matter. We may incur substantial additional costs to bring acquired companies' systems into compliance with Section 404 of the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley"). Our ability to attract and retain qualified financial experts will also impact our ability to comply with financial reporting and Sarbanes-Oxley regulations. If we are not able to maintain the requirements of Section 404 of Sarbanes-Oxley in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities. This type of action could adversely affect our financial results or investors' confidence in our company and our ability to access capital markets and could cause our stock price to decline. Trade restrictions may present barriers to entry in certain international markets. Restrictions on trade with certain international markets could affect our ability to expand into those markets. In addition, the existence of government subsidies available to our competitors in certain countries may affect our ability to compete on a price basis. We may be unable to keep pace with rapidly changing technology in wind turbine component manufacturing. The global market for wind turbines is rapidly evolving technologically. Our component manufacturing equipment and technology may not be suited for future generations of products being developed by wind turbine companies. To maintain a successful business in our field, we must keep pace with technological developments and changing standards of our customers and potential customers and meet their constantly evolving demands. If we fail to adequately respond to the technological changes in our industry, or are not suited to provide components for new types of wind turbines, our net worth, financial condition and operating results may be adversely affected. We rely on unionized labor, the loss of which could adversely affect our future success. We are dependent on the services of unionized labor and have collective bargaining agreements with certain of our operations workforce. The loss of the services of these and other personnel, whether through terminations, attrition, labor strike, or otherwise, or a material change in our collective Table of Contents bargaining agreements, could have a material adverse impact on us and our future profitability. A collective bargaining unit in place at our Cicero facility is under contract through February 2010 and the contract for the collective bargaining unit in place at our Neville Island facility expired at the end of October 2009. An agreement with our Neville Island collective bargaining unit, which has resulted in a three year extension for the contract, was ratified in November 2009. As of September 30, 2009, our collective bargaining units represent approximately 24% of our workforce. We need to hire additional personnel, including management personnel, and the loss of our key personnel could harm our business. Our future success will depend largely on the skills, efforts and motivation of our executive officers and other key personnel. Our success also depends, in large part, upon our ability to attract and retain highly qualified management and key personnel throughout our organization. Because of the nature of our rapid growth, which has occurred both organically and through acquisitions, we will likely need to hire additional personnel, including management personnel, to fill in our organization. We face competition in the attraction and retention of personnel who possess the skill sets that we seek. In addition, key personnel may leave our company and subsequently compete against us. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business, results of operations, or financial condition. Our ability to comply with regulatory requirements is critical to our future success and our current level of controls cannot guarantee that we are in compliance with all such requirements. As a manufacturer and distributor of wind and other energy industry products we may be or become subject to the requirements of federal, state and local or foreign regulatory authorities. In addition, we are subject to a number of industry standard-setting authorities, such as the American Gear Manufacturers Association and the American Welding Society. Changes in the standards and requirements imposed by such authorities could have a material adverse effect on us. In the event we are unable to meet any such standards when adopted our business could be adversely affected. We may not be able to obtain all regulatory approvals, licenses and permits that may be required in the future, or any necessary modifications to existing regulatory approvals, licenses and permits, or maintain all required regulatory approvals, licenses and permits. There can be no guarantee that our businesses are in full compliance with such standards and requirements. We continue to develop our internal controls with a goal of providing a greater degree of certainty that our businesses are in compliance with applicable governmental and regulatory requirements, but our current level of internal control may fail to reveal to us material instances of non-compliance with such requirements, and such non-compliance could have a material adverse effect on our business. Our principal stockholder holds a large percentage of our common stock and influences our affairs significantly. Tontine owns approximately 47.7% of our outstanding common stock as of December 31, 2009 and will own 38.5% of our common stock after completion of this offering (assuming the underwriters do not exercise their over-allotment option). Tontine has, and will continue to have after this offering, the right to designate three individuals on our board of directors pursuant to a Securities Purchase Agreement entered into with Broadwind in August 2007. As a result, Tontine has, and will continue to have after this offering, the voting power to significantly influence our policies, business and affairs, and the outcome of any corporate transaction or other matter, including mergers, consolidations and the sale of all, or substantially all, of our assets. Tontine's significant ownership level may have the effect of delaying, deterring, or preventing a change in control that otherwise could result in a premium in the Table of Contents price of our common stock. Tontine and its affiliates may invest in entities that directly or indirectly compete with us or companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of Tontine and the interests of our other stockholders arise, the Tontine-designated directors may have conflicts of interest. Although our directors and officers will have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible, if done in compliance with Delaware law. The actions of Tontine may have the effect of influencing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest. We may not have the technical expertise, and we may be unable to secure the necessary patents or other intellectual property rights, needed to successfully market new products that we may develop. A key element of our business and operating strategy is to exploit our technological ability to design new manufacturing processes and products to take advantage of the anticipated growth in the North American wind market. Historically, we have not developed patented technology or engaged in technical design work on a significant scale. If we are unable to develop new manufacturing processes and products that are attractive to our customers and potential customers, or if we are unable to secure the necessary patents or other intellectual property rights needed to prevent our competitors from developing and marketing substantially similar products, we could experience a material and adverse effect on our business and results of operations. We cannot insure against all potential risks and may have difficulty insuring our business activities or become subject to increased insurance premiums. Our business is subject to a number of risks, including inherent risks associated with manufacturing, heavy-haul transport, and service and construction support for wind turbines. To mitigate the risks associated with our business, we have entered into various insurance policies. However, our insurance policies have high deductibles in certain instances and do not cover losses as a result of certain events such as terrorist attacks. In addition, our insurance policies are subject to annual review by our insurers and these policies may not be renewed at all or on similar or favorable terms. If we were to incur a significant uninsured loss or a loss in excess of the limits of our insurance policies, the results could have a material adverse effect on our business, financial condition and results of operations. We are required to devote substantial time to public company reporting obligations, which may divert management's attention from the growth and operation of our business. As a public company, we incur significant legal, accounting and other expenses, and we are subject to the SEC's rules and regulations relating to public disclosure that generally involve a substantial expenditure of financial resources and managerial time. In addition, Sarbanes-Oxley, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies. Full compliance with these rules and regulations represents a significant portion of our legal and financial compliance costs and has made some activities more time-consuming and costly. We may also incur substantial additional costs to bring acquired companies' systems into compliance with Section 404 of Sarbanes-Oxley. Such additional reporting and compliance costs may negatively impact our financial results. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed. As a public company, we also expect that new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same Table of Contents coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. It may be time-consuming, difficult and costly for us to continue our development and implementation of the internal controls and reporting procedures required by Sarbanes-Oxley. Some members of our management team have limited experience operating a company with securities traded or listed on an exchange, or subject to SEC rules and requirements, including SEC reporting practices and requirements that are applicable to a publicly traded company. We may need to recruit, hire, train and retain additional financial reporting, internal controls and other personnel in order to develop and implement appropriate internal controls and reporting procedures. Risks Relating to Our Common Stock and This Offering Future sales of our common stock may depress our share price. After this offering, we will have 106,696,687 shares of common stock outstanding. The 15,000,000 shares sold in this offering (or 17,250,000 shares if the underwriters exercise their option to purchase additional shares of our common stock in full) will be freely tradable without restriction or further registration under federal securities laws unless purchased by our affiliates. In addition, 53,643,103 shares of our common stock to be held by Tontine and Mr. Drecoll, our Chief Executive Officer and one of our directors, after this offering (assuming the underwriters do not exercise their option to purchase additional shares) have been registered for resale pursuant to an effective registration statement and may be sold following the expiration of the lock-up agreements entered into in connection with this offering. Furthermore, several of our other stockholders will continue to have certain demand and "piggy-back" registration rights with respect to the common stock that they own. When shares of our common stock are registered, it significantly facilitates the ability of the holders to sell the shares in the market. Sales of our common stock may decrease the trading price of our common stock and make it more difficult or impossible for our other stockholders to sell their shares at favorable prices. In a Schedule 13D/A filed with the SEC on November 10, 2008, Tontine stated its intention to explore alternatives for the disposition of its equity interest in the Company. Sales of our common stock by Tontine and/or Mr. Drecoll, or the announcement or expectation by others of such sales, may decrease the trading price of our common stock. The price of our common stock may fluctuate substantially and your investment may decline in value. The market price of our common stock has been volatile and may fluctuate substantially due to many factors, including: actual or anticipated fluctuations in our results of operations; failure to meet our earnings estimates should we decide to provide such estimates in the future; conditions and trends in the energy markets in which we operate and changes in the estimation of the size and growth rate of these markets; changes or proposed changes in, or differing interpretations of, laws or regulations affecting our business or the businesses of our customers, including state renewable portfolio standard programs and the various federal tax incentives available to our customers; natural disasters, war and/or terrorism, which may disrupt our operations and those of our customers; additions or departures of members of our senior management or other key personnel; announcements of significant contracts or development by us or our competitors; Table of Contents loss of one or more of our significant revenue sources; changes in market valuation or earnings of our competitors; the trading volume of our common stock; reports published by industry or securities analysts or the cessation of the publication of those reports; and general market and economic conditions. In addition, the stock market in general, and the Nasdaq Global Select Market, as well as the market for broader energy and renewable energy companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially and adversely affect the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources, which could materially harm our business, results of operations, financial condition and cash flow. Provisions in our charter documents, certain agreements to which we are a party and Delaware law may delay or prevent acquisition of our Company, which could adversely affect the value of our common stock. Provisions contained in our certificate of incorporation and bylaws, certain agreements to which we are a party, as well as provisions of the Delaware General Corporation Law, could delay or make it more difficult to remove incumbent directors or for a third party to acquire us, even if a takeover would benefit our stockholders. These provisions include: the power of the board of directors to fill any vacancy on the board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; the ability of Tontine to designate three out of the six members of our board of directors; the inability of stockholders to fix the number of directors; and the inability of stockholders to call special meetings. Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, up to 10,000,000 shares of preferred stock, par value $0.001 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares. Table of Contents

parsed_sections/risk_factors/2010/CALX_calix-inc_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, financial condition and results of operations. Before you decide whether to invest in our common stock, you should carefully consider these risks and uncertainties, together with all of the other information included in this prospectus. Risks Related to Our Business and Industry Our markets are rapidly changing and we have a limited operating history, which make it difficult to predict our future revenue and plan our expenses appropriately. We were incorporated in August 1999 and shipped our first product in December 2001. We have a limited operating history and compete in markets characterized by rapid technological change, changing needs of communications service providers, or CSPs, evolving industry standards and frequent introductions of new products and services. We have limited historical data and have had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories. In addition, we likely will be required to reposition our product and service offerings and introduce new products and services as we encounter rapidly changing CSP requirements and increasing competitive pressures. We may not be successful in doing so in a timely and responsive manner, or at all. As a result, it is difficult to forecast our future revenues and plan our operating expenses appropriately, which also makes it difficult to predict our future operating results. We have a history of losses and negative cash flow, and we may not be able to generate positive operating income and cash flows in the future. We have experienced net losses in each year of our existence. For the years ended December 31, 2007, 2008 and 2009, we incurred net losses of $24.9 million, $12.9 million and $22.4 million, respectively. As of December 31, 2009, we had an accumulated deficit of $392.2 million. We expect to continue to incur significant expenses for research and development, sales and marketing, customer support and general and administrative functions as we expand our operations. Given our rapid growth rate and the intense competitive pressures we face, we may be unable to control our operating costs. We cannot guarantee that we will achieve profitability in the future. Our revenue growth trends in prior periods may not be sustainable. In addition, we will have to generate and sustain significantly increased revenue, while continuing to control our expenses, in order to achieve and then maintain profitability. We may also incur significant losses in the future for a number of reasons, including the risks discussed in this Risk Factors section and factors that we cannot anticipate. If we are unable to generate positive operating income and cash flow from operations, our liquidity, results of operations and financial condition will be adversely affected. Fluctuations in our quarterly and annual operating results may make it difficult to predict our future performance, which could cause our operating results to fall below investor or analyst expectations, which could adversely affect the trading price of our stock. A number of factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make Table of Contents financial planning and forecasting difficult. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock would likely decline. Moreover, we may experience delays in recognizing revenue under applicable revenue recognition rules, particularly from government-funded contracts, such as those funded by the United States Department of Agriculture s Rural Utility Service, or RUS. The extent of these delays and their impact on our revenues can fluctuate over a given time period depending on the number and size of purchase orders under these contracts during such time period. In addition, unanticipated decreases in our available liquidity due to fluctuating operating results could limit our growth and delay implementation of our expansion plans. In addition to the other risk factors listed in this Risk Factors section, factors that may contribute to the variability of our operating results include: our ability to predict our revenue and plan our expenses appropriately; the capital spending patterns of CSPs and any decrease or delay in capital spending by CSPs due to economic, regulatory or other reasons; the impact of government-sponsored programs on our customers; intense competition; our ability to develop new products or enhancements that support technological advances and meet changing CSP requirements; our ability to achieve market acceptance of our products and CSPs willingness to deploy our new products; the concentration of our customer base; the length and unpredictability of our sales cycles; our focus on CSPs with limited revenue potential; our lack of long-term, committed-volume purchase contracts with our customers; our ability to increase our sales to larger North American as well as international CSPs; our exposure to the credit risks of our customers; fluctuations in our gross margin; the interoperability of our products with CSP networks; our dependence on sole and limited source suppliers; our ability to manage our relationships with our contract manufacturers; our ability to forecast our manufacturing requirements and manage our inventory; our products compliance with industry standards; our ability to expand our international operations; our ability to protect our intellectual property and the cost of doing so; the quality of our products, including any undetected hardware errors or bugs in our software; our ability to estimate future warranty obligations due to product failure rates; our ability to obtain necessary third-party technology licenses; Table of Contents any obligation to issue performance bonds to satisfy requirements under RUS contracts; the attraction and retention of qualified employees and key personnel; and our ability to maintain proper and effective internal controls. Our business is dependent on the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs, in response to recent economic conditions or otherwise, would reduce our revenues and harm our business. Demand for our products depends on the magnitude and timing of capital spending by CSPs as they construct, expand and upgrade their access networks. For the year ended December 31, 2009, CenturyLink, Inc. and its predecessors Embarq Corporation and CenturyTel, Inc., which we refer to together as CenturyLink, purchased a significant amount of our access systems and software as a result of an increase in their deployments. However, we cannot anticipate the level of CenturyLink s purchases in the future. In addition, the recent economic downturn has contributed to a slowdown in telecommunications industry spending, including in the specific geographies and markets in which we operate. In response to reduced consumer spending, challenging capital markets or declining liquidity trends, capital spending for network infrastructure projects of CSPs could be delayed or cancelled. In addition, capital spending is cyclical in our industry and sporadic among individual CSPs, and can change on short notice. As a result, we may not have visibility into changes in spending behavior until nearly the end of a given quarter. CSP spending on network construction, maintenance, expansion and upgrades is also affected by seasonality in their purchasing cycles, reductions in their budgets and delays in their purchasing cycles. Many factors affecting our results of operations are beyond our control, particularly in the case of large CSP orders and network infrastructure deployments involving multiple vendors and technologies where the achievement of certain thresholds for acceptance is subject to the readiness and performance of the customer or other providers, and changes in customer requirements or installation plans. Further, CSPs may not pursue infrastructure upgrades that require our access systems and software. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles, mergers, lack of consumer demand for advanced communications services and alternative approaches to service delivery. Reductions in capital expenditures by CSPs may slow our rate of revenue growth. As a consequence, our results for a particular quarter may be difficult to predict, and our prior results are not necessarily indicative of results likely in future periods. Government-sponsored programs could impact the timing and buying patterns of CSPs, which may cause fluctuations in our operating results. Many of our customers are Independent Operating Companies, or IOCs, which have revenues that are particularly dependent upon interstate and intrastate access charges, and federal and state subsidies. The Federal Communications Commission, or FCC, and some states are considering changes to such payments and subsidies, and these changes could reduce IOC revenues. Furthermore, many IOCs use or expect to use, government-supported loan programs or grants, such as RUS loans and grants and the Broadband Stimulus programs under the American Recovery and Reinvestment Act of 2009, or ARRA, to finance capital spending. Changes to these programs could reduce the ability of IOCs to access capital and reduce our revenue opportunities. We believe that uncertainties related to Broadband Stimulus programs may be delaying investment decisions by IOCs. In addition, to the extent that our customers do receive grants or loans under these stimulus programs, our customers may be encouraged to accelerate their network development plans and purchase substantial quantities of products, from us or other suppliers, while the programs and funding are in place. Customers may thereafter substantially curtail future purchases of products as ARRA funding Table of Contents winds down or because all purchases have been completed. Award grants under the Broadband Stimulus programs have been and will be issued between December 2009 and September 2010. Funded projects must be two-thirds complete within two years of the award and complete within three years of the award. Therefore, all funds that are awarded are expected to be expended by September 2013. The revenue recognition guidelines related to the sales of our access systems to CSPs who have received Broadband Stimulus funds may create uncertainties around the timing of our revenue, which could harm our financial results. In addition, any decision by CSPs to reduce capital expenditures caused by changes in government regulations and subsidies would have an adverse effect on our operating results and financial condition. We face intense competition that could reduce our revenue and adversely affect our financial results. The market for our products is highly competitive, and we expect competition from both established and new companies to increase. Our competitors include companies such as ADTRAN, Inc., Alcatel-Lucent S.A., Enablence Technologies Inc., Huawei Technologies Co., Ltd., LM Ericsson Telephone Company, or Ericsson, Motorola, Inc., Occam Networks, Inc., Tellabs, Inc. and Zhone Technologies, Inc. Our ability to compete successfully depends on a number of factors, including: the successful development of new products; our ability to anticipate CSP and market requirements and changes in technology and industry standards; our ability to differentiate our products from our competitors offerings based on performance, cost-effectiveness or other factors; our ability to gain customer acceptance of our products; and our ability to market and sell our products. The market for broadband access equipment is dominated primarily by large, established vendors. In addition, some of our competitors have merged, made acquisitions or entered into partnerships or other strategic relationships with one another to offer more comprehensive solutions than they individually had offered. Examples include the merger of Alcatel S.A. with Lucent Technologies, Inc. in November 2006, Ericsson s acquisitions of Redback Networks Inc. in January 2007 and Entrisphere Inc. in February 2007, and Ciena Corporation s acquisition of World Wide Packets, Inc. in 2008 and the successful bid to acquire Nortel s Metro Ethernet Networks business announced in November 2009. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to acquire and offer complementary products and services technologies. Many of our competitors have broader product lines and can offer bundled solutions, which may appeal to certain customers. Our competitors may invest additional resources in developing more compelling product offerings. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features, because the products that we and our competitors offer require a substantial investment of time and funds to install. In addition, as a result of these transition costs, competition to secure contracts with potential customers is particularly intense. Some of our competitors may offer substantial discounts or rebates to win new customers. If we are forced to reduce prices in order to secure customers, we may be unable to sustain gross margins at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results. Table of Contents Product development is costly and if we fail to develop new products or enhancements that meet changing CSP requirements, we could experience lower sales. Our market is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and unanticipated changes in subscriber requirements. Our future success will depend significantly on our ability to anticipate and adapt to such changes, and to offer, on a timely and cost-effective basis, products and features that meet changing CSP demands and industry standards. We intend to continue making significant investments in developing new products and enhancing the functionality of our existing products. Developing our products is expensive, complex and involves uncertainties. We may not have sufficient resources to successfully manage lengthy product development cycles. In 2008 and 2009, our research and development expenses were $44.3 million, or 18% of our revenue, and $46.1 million, or 20% of our revenue, respectively. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. These investments may take several years to generate positive returns, if ever. In addition, we may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline. In addition, the introduction of new or enhanced products also requires that we manage the transition from older products to these new or enhanced products in order to minimize disruption in customer ordering patterns, fulfill ongoing customer commitments and ensure that adequate supplies of new products are available for delivery to meet anticipated customer demand. If we fail to maintain compatibility with other software or equipment found in our customers existing and planned networks, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share. Moreover, as customers complete infrastructure deployments, they may require greater levels of service and support than we have provided in the past. We may not be able to provide products, services and support to compete effectively for these market opportunities. If we are unable to anticipate and develop new products or enhancements to our existing products on a timely and cost-effective basis, we could experience lower sales which would harm our business. Our new products are early in their life cycles and are subject to uncertain market demand. If our customers are unwilling to install our products or deploy new services or we are unable to achieve market acceptance of our new products, our business and financial results will be harmed. Our new products are early in their life cycles and are subject to uncertain market demand. They also may face obstacles in manufacturing, deployment and competitive response. Potential customers may choose not to invest the additional capital required for initial system deployment. In addition, demand for our products is dependent on the success of our customers in deploying and selling services to their subscribers. Our products support a variety of advanced broadband services, such as high-speed Internet, Internet protocol television, mobile broadband, high-definition video and online gaming, and basic voice and data services. If subscriber demand for such services does not grow as expected or declines, or if our customers are unable or unwilling to deploy and market these services, demand for our products may decrease or fail to grow at rates we anticipate. For example, we launched our E5-400 platform family in the fourth quarter of 2008 and have only recently begun to see significant demand. Our strategy includes developing products for the access network that incorporate Internet protocol and Ethernet technologies. If these technologies are not widely adopted by CSPs for use in their access networks, demand for our products may decrease or not grow. As a result, we may be unable to sell our products to recoup our expenses related to the development of these products and our results of operations would be harmed. We may also be delayed in recognizing revenue related to our new Table of Contents products and related services and may be required to recognize costs and expenses for such products before we can recognize the related revenue. Our customer base is concentrated, and there are a limited number of potential customers for our products. The loss of any of our key customers, a decrease in purchases by our key customers or our inability to grow our customer base would adversely impact our revenues. Historically, a large portion of our sales have been to a limited number of customers. For example, for the year ended December 31, 2009, CenturyLink accounted for 38% of our revenue. In 2008, CenturyLink and one other customer accounted for 25% and 11% of our revenue, respectively. In 2007, CenturyLink and another different customer accounted for 22% and 15% of our revenue, respectively. We anticipate that a large portion of our revenues will continue to depend on sales to a limited number of customers. In addition, some larger customers may demand discounts and rebates or desire to purchase their access systems and software from multiple providers. As a result of these factors, our future revenue opportunities may be limited and our margins could be reduced, and our profitability may be adversely impacted. The loss of, or reduction in, orders from any key customer would significantly reduce our revenues and harm our business. Furthermore, in recent years, the CSP market has undergone substantial consolidation. Industry consolidation generally has negative implications for equipment suppliers, including a reduction in the number of potential customers, a decrease in aggregate capital spending, and greater pricing leverage on the part of CSPs over equipment suppliers. Continued consolidation of the CSP industry, including among the Incumbent Local Exchange Carrier, or ILEC, and IOC customers, who represent a large part of our business, could make it more difficult for us to grow our customer base, increase sales of our products and maintain adequate gross margins. Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly. The timing of our revenues is difficult to predict. Our sales efforts often involve educating CSPs about the use and benefits of our products. CSPs typically undertake a significant evaluation process, which frequently involves not only our products but also those of our competitors and results in a lengthy sales cycle. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all we may not achieve our revenue forecasts and our business could be harmed. Our focus on CSPs with relatively small networks limits our revenues from sales to any one customer and makes our future operating results difficult to predict. We currently focus a large portion of our sales efforts on IOCs, cable multiple system operators and selected international CSPs. In general, our current and potential customers generally operate small networks with limited capital expenditure budgets. Accordingly, we believe the potential revenues from the sale of our products to any one of these customers is limited. As a result, we must identify and sell products to new customers each quarter to continue to increase our sales. In addition, the spending patterns of many of our customers are characterized by small and sporadic purchases. As a consequence, we have limited backlog and will likely continue to have limited visibility into future operating results. We do not have long-term, committed-volume purchase contracts with our customers, and therefore have no guarantee of future revenue from any customer. Our sales are made predominantly pursuant to purchase orders, and typically we have not entered into long-term, committed-volume purchase contracts with our customers, including our key customers Table of Contents which account for a material portion of our revenues. As a result, any of our customers may cease to purchase our products at any time. In addition, our customers may attempt to renegotiate the terms of our agreements, including price and quantity. If any of our key customers stop purchasing our access systems and software for any reason, our business and results of operations would be harmed. Our efforts to increase our sales to larger North American as well as international CSPs may be unsuccessful. Our sales and marketing efforts have been focused on CSPs in North America. A part of our long-term strategy is to increase sales to larger North American as well as international CSPs. We will be required to devote substantial technical, marketing and sales resources to the pursuit of these CSPs, who have lengthy equipment qualification and sales cycles, without any assurance of generating sales. In particular, sales to these CSPs may require us to upgrade our products to meet more stringent performance criteria, develop new customer-specific features or adapt our product to meet international standards. If we are unable to successfully increase our sales to larger CSPs, our operating results and long-term growth may be negatively impacted. Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. The recent challenging economic conditions have impacted some of our customers ability to pay their accounts payable. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur, and could harm our operating results. Our gross margin may fluctuate over time and our current level of product gross margins may not be sustainable. Our current level of product gross margins may not be sustainable and may be adversely affected by numerous factors, including: changes in customer, geographic or product mix, including the mix of configurations within each product group; increased price competition, including the impact of customer discounts and rebates; our ability to reduce and control product costs; loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand; introduction of new products; changes in shipment volume; changes in distribution channels; increased warranty costs; excess and obsolete inventory and inventory holding charges; expediting costs incurred to meet customer delivery requirements; and liquidated damages relating to customer contractual terms. Table of Contents Our products must interoperate with many software applications and hardware products found in our customers networks. If we are unable to ensure that our products interoperate properly, our business would be harmed. Our products must interoperate with our customers existing and planned networks, which often have varied and complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing and planned networks. To meet these requirements, we must undertake development efforts that require substantial capital investment and employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. If we fail to maintain compatibility with other software or equipment found in our customers existing and planned networks, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share. We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. These arrangements give us access to, and enable interoperability with, various products that we do not otherwise offer. If these relationships fail, we may have to devote substantially more resources to the development of alternative products and processes, and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other vendors are either companies that we compete with directly, or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of those customers. Some of our competitors have stronger relationships with some of our existing and potential other vendors and, as a result, our ability to have successful interoperability arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm our ability to successfully sell and market our products. As we do not have manufacturing capabilities, we depend upon a small number of outside contract manufacturers and we do not have supply contracts with these manufacturers. Our operations could be disrupted if we encounter problems with these contract manufacturers. We do not have internal manufacturing capabilities, and rely upon a small number of contract manufacturers to build our products. In particular, we rely on Flextronics International Ltd. for the manufacture of most of our products. Our reliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs. We do not have supply contracts with Flextronics or our other manufacturers. Consequently, these manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price. In addition, we have limited control over our contract manufacturers quality systems and controls, and therefore may not be able to ensure levels of quality manufacture suitable for our customers. The revenues that Flextronics generates from our orders represent a relatively small percentage of Flextronics overall revenues. As a result, fulfilling our orders may not be considered a priority in the event Flextronics is constrained in its ability to fulfill all of its customer obligations in a timely manner. In addition, a substantial part of our manufacturing is done in Flextronics facilities which are located outside of the United States. We believe that the location of these facilities outside of the United States increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls. If Flextronics or any of our other contract manufacturers were unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative contract manufacturers. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in manufacturing would require us Table of Contents to reduce our supply of products to our customers, which in turn would reduce our revenues and harm our relationships with our customers. We depend on sole source and limited source suppliers for key components and products. If we are unable to source these components on a timely basis, we will not be able to deliver our products to our customers. We depend on sole source and limited source suppliers for key components of our products. For example, certain of our application-specific integrated circuits processors and resistor networks are purchased from sole source suppliers. We may from time to time enter into original equipment manufacturer, or OEM, or original design manufacturer, or ODM, agreements to manufacture and/or design certain products in order to enable us to offer products into key markets on an accelerated basis. For example, a third party assisted in the design of and manufactures our E5-100 platform family. Any of the sole source and limited source suppliers, OEMs and ODMs upon whom we rely could stop producing our components or products, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors. We generally do not have long-term supply agreements with our suppliers, and our purchase volumes are currently too low for us to be considered a priority customer by most of our suppliers. As a result, most of these suppliers could stop selling to us at commercially reasonable prices, or at all. Any such interruption or delay may force us to seek similar components or products from alternative sources, which may not be available. Switching suppliers, OEMs or ODMs may require that we redesign our products to accommodate new components, and may potentially require us to re-qualify our products with our customers, which would be costly and time-consuming. Any interruption in the supply of sole source or limited source components for our products would adversely affect our ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business. If we fail to forecast our manufacturing requirements accurately and manage our inventory with our contract manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue. We bear inventory risk under our contract manufacturing arrangements. Lead times for the materials and components that we order through our contract manufacturers vary significantly and depend on numerous factors, including the specific supplier, contract terms and market demand for a component at a given time. Lead times for certain key materials and components incorporated into our products are currently lengthy, requiring us or our contract manufacturers to order materials and components several months in advance of manufacture. If we overestimate our production requirements, our contract manufacturers may purchase excess components and build excess inventory. If our contract manufacturers, at our request, purchase excess components that are unique to our products or build excess products, we could be required to pay for these excess parts or products and recognize related inventory write-down costs. Historically, we have reimbursed our primary contract manufacturer for inventory purchases when our inventory has been rendered obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of parts by our suppliers, or in cases where inventory levels greatly exceed projected demand. If we experience excess inventory write-downs associated with excess or obsolete inventory, this would have an adverse effect on our gross margins, financial condition and results of operations. We have experienced unanticipated increases in demand from customers which resulted in delayed shipments and variable shipping patterns. If we underestimate our product requirements, our contract manufacturers may have inadequate component inventory, which could interrupt manufacturing of our products and result in delays or cancellation of sales. Table of Contents If we fail to comply with evolving industry standards, sales of our existing and future products would be adversely affected. The markets for our products are characterized by a significant number of standards, both domestic and international, which are evolving as new technologies are deployed. Our products must comply with these standards in order to be widely marketable. In some cases, we are compelled to obtain certifications or authorizations before our products can be introduced, marketed or sold. In addition, our ability to expand our international operations and create international market demand for our products may be limited by regulations or standards adopted by other countries that may require us to redesign our existing products or develop new products suitable for sale in those countries. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, we may not be able to design our products to comply with evolving standards and regulations in the future. Accordingly, this ongoing evolution of standards may directly affect our ability to market or sell our products. Further, the cost of complying with the evolving standards and regulations, or the failure to obtain timely domestic or foreign regulatory approvals or certification such that we may not be able to sell our products where these standards or regulations apply, would result in lower revenues and lost market share. We may be unable to successfully expand our international operations. In addition, our international expansion plans, if implemented, will subject us to a variety of risks that may harm our business. We currently generate almost all of our sales from customers in North America and the Caribbean, and have very limited experience marketing, selling and supporting our products and services outside North America and the Caribbean or managing the administrative aspects of a worldwide operation. While we intend to expand our international operations, we may not be able to create or maintain international market demand for our products. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business, financial condition and results of operations will suffer. In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including: differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions; greater difficulty supporting and localizing our products; different or unique competitive pressures as a result of, among other things, the presence of local equipment suppliers; challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, compensation and benefits and compliance programs; limited or unfavorable intellectual property protection; risk of change in international political or economic conditions; and restrictions on the repatriation of earnings. We may have difficulty managing our growth, which could limit our ability to increase sales. We have experienced significant growth in sales and operations in recent years. We expect to continue to expand our research and development, sales, marketing and support activities. Our historical Table of Contents growth has placed, and planned future growth is expected to continue to place, significant demands on our management, as well as our financial and operational resources, to: manage a larger organization; expand our manufacturing and distribution capacity; increase our sales and marketing efforts; broaden our customer support capabilities; implement appropriate operational and financial systems; and maintain effective financial disclosure controls and procedures. If we cannot grow, or fail to manage our growth effectively, we may not be able to execute our business strategies and our business, financial condition and results of operations would be adversely affected. We may not be able to protect our intellectual property, which could impair our ability to compete effectively. We depend on certain proprietary technology for our success and ability to compete. As of December 31, 2009, we held 22 U.S. patents expiring between 2015 and 2026, and had 32 pending U.S. patent applications. Two of the U.S. patents are also covered by granted international patents, one in five countries and the other in three countries. We currently have no pending international patent applications. We rely on intellectual property laws, as well as nondisclosure agreements, licensing arrangements and confidentiality provisions, to establish and protect our proprietary rights. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent. Our pending patent applications may not result in issued patents, and our issued patents may not be enforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales. Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property would be difficult for us. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and could harm our business. On December 28, 2009, we filed a lawsuit against Wi-LAN Inc., or Wi-LAN, of Ontario, Canada, in the federal court in the Northern District of California, seeking declaratory relief that we do not infringe U.S. Patents Nos. 5,956,323 and 6,763,019, allegedly owned by Wi-LAN. We intend to pursue the lawsuit vigorously and, if Wi-LAN asserts a counterclaim for alleged infringement by us of the 323 and/or 019 patents and seeks monetary and/or injunctive relief, we intend to defend vigorously against such counterclaim. While we believe we have substantial and meritorious defenses to any such counterclaim, neither the outcome of the litigation nor the amount and range of potential damages or exposure associated with the litigation can be assessed with certainty, and we are not currently able to estimate the loss, if any, that may result from this claim. If injunctive relief were sought by Wi-LAN and granted, it could force us to stop or alter certain of our business activities. Table of Contents We could become subject to litigation regarding intellectual property rights that could harm our business. We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. Third parties may assert patent, copyright, trademark or other intellectual property rights to technologies or rights that are important to our business. Such claims may involve patent holding companies or other adverse patent owners who have no relevant product revenue, and therefore our own issued and pending patents may provide little or no deterrence. We have received in the past and expect that in the future we may receive, particularly as a public company, communications from competitors and other companies alleging that we may be infringing their patents, trade secrets or other intellectual property rights and/or offering licenses to such intellectual property or threatening litigation. In addition, we have agreed, and may in the future agree, to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Any claims asserting that our products infringe, or may infringe on, the proprietary rights of third parties, with or without merit, could be time-consuming, resulting in costly litigation and diverting the efforts of our engineering teams and management. These claims could also result in product shipment delays or require us to modify our products or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all. The quality of our support and services offerings is important to our customers, and if we fail to continue to offer high quality support and services we could lose customers which would harm our business. Once our products are deployed within our customers networks, they depend on our support organization to resolve any issues relating to those products. A high level of support is critical for the successful marketing and sale of our products. If we do not effectively assist our customers in deploying our products, succeed in helping them quickly resolve post-deployment issues or provide effective ongoing support, it could adversely affect our ability to sell our products to existing customers and harm our reputation with potential new customers. As a result, our failure to maintain high quality support and services could result in the loss of customers which would harm our business. Our products are highly technical and may contain undetected hardware errors or software bugs, which could harm our reputation and adversely affect our business. Our products are highly technical and, when deployed, are critical to the operation of many networks. Our products have contained and may contain undetected errors, bugs or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by customers, and may in some cases only be detected under certain circumstances or after extended use. Any errors, bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customer goodwill and customers and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management s attention and adversely affect the market s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted. Table of Contents Our estimates regarding future warranty obligations may change due to product failure rates, shipment volumes, field service obligations and rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased, impacting future cost of goods sold. Our products are highly complex, and our product development, manufacturing and integration testing may not be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty obligations arise due to reliability or quality issues arising from defects in software, faulty components or manufacturing methods, our operating results and financial position could be negatively impacted by: cost associated with fixing software or hardware defects; high service and warranty expenses; high inventory obsolescence expense; delays in collecting accounts receivable; payment of liquidated damages for performance failures; and declining sales to existing customers. Our use of open source software could impose limitations on our ability to commercialize our products. We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses. If we are unable to obtain necessary third-party technology licenses, our ability to develop new products or product enhancements may be impaired. While our current licenses of third-party technology relate to commercially available off-the-shelf technology, we may in the future be required to license additional technology from third parties to develop new products or product enhancements. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to obtain necessary third-party licenses may force us to obtain substitute technology of lower quality or performance standards or at greater cost, any of which could harm the competitiveness of our products and result in lost revenues. We may pursue acquisitions, which involve a number of risks. If we are unable to address and resolve these risks successfully, such acquisitions could disrupt our business. In February 2006, we acquired Optical Solutions, Inc. in order to support the expansion of our product and service offerings. While we do not currently have plans to make an acquisition, we may in the future acquire businesses, products or technologies to expand our product offerings and capabilities, customer base and business. We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. We have limited experience making such acquisitions. Any of these transactions could be material to our financial condition and results of operations. The anticipated benefit Table of Contents of acquisitions may never materialize. In addition, the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where we may face acquisition-related risks include: diversion of management time and potential business disruptions; expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed; retaining and integrating employees from any businesses we may acquire; issuance of dilutive equity securities or incurrence of debt; integrating various accounting, management, information, human resource and other systems to permit effective management; incurring possible write-offs, impairment charges, contingent liabilities, amortization expense or write-offs of goodwill; difficulties integrating and supporting acquired products or technologies; unexpected capital expenditure requirements; insufficient revenues to offset increased expenses associated with the acquisition; opportunity costs associated with committing capital to such acquisitions; and acquisition-related litigation. Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operating problems. Our inability to address successfully such risks could disrupt our business. Our obligation to issue performance bonds to satisfy requirements under RUS contracts may negatively impact our working capital and financial condition. We are often required to issue performance bonds to satisfy requirements under our RUS contracts. The performance bonds generally cover the full amount of the RUS contract. Upon our performance under the contract and acceptance by the customer, the performance bond is released. The time period between issuing the performance bond and its release can be lengthy. We issue letters of credit under our existing credit facility to support these performance bonds. In the event we do not have sufficient capacity under our credit facility to support these bonds, we will have to issue certificates of deposit, which could materially impact our working capital or limit our ability to satisfy such contract requirements. In the event that we are unable to issue such bonds, we may lose business and customers who purchase under RUS contracts. In addition, if we exhaust our credit facility or working capital reserves in issuing such bonds, we may be required to eliminate or curtail expenditures to mitigate the impact on our working capital or financial condition. Our use of and reliance upon development resources in China may expose us to unanticipated costs or liabilities. We outsource a portion of our quality assurance and cost reduction engineering to a dedicated team of engineers based in Nanjing, China. We also outsource a portion of our software development to a team of software engineers based in Shenyang, China. Our reliance upon development resources in China may not enable us to achieve meaningful product cost reductions or greater resource efficiency. Further, our development efforts and other operations in China involve significant risks, including: difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and resulting wage inflation; Table of Contents the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and third parties; heightened exposure to changes in the economic, security and political conditions of China; fluctuation in currency exchange rates and tax risks associated with international operations; and development efforts that do not meet our requirements because of language, cultural or other differences associated with international operations, resulting in errors or delays. Difficulties resulting from the factors above and other risks related to our operations in China could expose us to increased expense, impair our development efforts, harm our competitive position and damage our reputation. Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could harm our business. The FCC has jurisdiction over all of our U.S. customers. FCC regulatory policies that create disincentives for investment in access network infrastructure or impact the competitive environment in which our customers operate may harm our business. For example, future FCC regulation affecting providers of broadband Internet access services could impede the penetration of our customers into certain markets or affect the prices they may charge in such markets. Furthermore, many of our customers are subject to FCC rate regulation of interstate telecommunications services, and are recipients of federal universal service fund payments, which are intended to subsidize telecommunications services in areas that are expensive to serve. In addition, many of our customers are subject to state regulation of intrastate telecommunications services, including rates for such services, and may also receive funding from state universal service funds. Changes in rate regulations or universal service funding rules, either at the federal or state level, could adversely affect our customers revenues and capital spending plans. In addition, various international regulatory bodies have jurisdiction over certain of our non-U.S. customers. Changes in these domestic and international standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against CSPs based on changed standards, laws and regulations could adversely affect the development of broadband networks and services. This, in turn, could directly or indirectly adversely impact the communications industry in which our customers operate. To the extent our customers are adversely affected by laws or regulations regarding their business, products or service offerings, our business, financial condition and results of operations would suffer. We may be subject to governmental export and import controls that could subject us to liability or impair our ability to compete in additional international markets. Our products may be or become subject to U.S. export controls that will restrict our ability to export them outside of the free-trade zones covered by the North American Free Trade Agreement, Central American Free Trade Agreement and other treaties and laws. Therefore, future international shipments of our products may require export licenses or export license exceptions. In addition, the import laws of other countries may limit our ability to distribute our products, or our customers ability to buy and use our products, in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could negatively impact our ability to sell our products to existing or potential international customers. Table of Contents If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted. Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management or key technical or sales personnel is bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key man life insurance covering our key personnel. If we lose the services of any key personnel, our business, financial condition and results of operations may suffer. Competition for skilled personnel, particularly those specializing in engineering and sales, is intense. We cannot be certain that we will be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively, both individually and as a group. In particular, we must continue to expand our direct sales force, including hiring additional sales managers, to grow our customer base and increase sales. In addition, if we offer employment to personnel employed by competitors, we may become subject to claims of unfair hiring practices, and incur substantial costs in defending ourselves against these claims, regardless of their merits. If we are unable to effectively recruit, hire and utilize new employees, execution of our business strategy and our ability to react to changing market conditions may be impeded, and our business, financial condition and results of operations may suffer. Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key personnel. Our executive officers have become, or will soon become, vested in a substantial amount of shares of common stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will be harmed. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our operating results, our ability to operate our business and our stock price. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have in the past discovered, and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected. We expect that we will be required to comply with Section 404 of the Sarbanes-Oxley Act in connection with our annual report on Form 10-K for the year ending December 31, 2011. We are expending significant resources in developing the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we are taking to improve our internal Table of Contents controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner. In addition, if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth. We will incur significant increased costs as a result of operating as a public company, which may adversely affect our operating results and financial condition. As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the New York Stock Exchange. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Furthermore, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and the New York Stock Exchange, would likely result in increased costs to us as we respond to their requirements. Risks Related to This Offering and Ownership of Our Common Stock Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid. Prior to this offering there has been no public market for shares of our common stock, and an active public market for our shares may not develop or be sustained after this offering. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock following this offering could be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this Risk Factors section of this prospectus and others such as: quarterly variations in our results of operations or those of our competitors; changes in earnings estimates or recommendations by securities analysts; announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments; developments with respect to intellectual property rights; our ability to develop and market new and enhanced products on a timely basis; our commencement of, or involvement in, litigation; changes in governmental regulations or in the status of our regulatory approvals; and a slowdown in the communications industry or the general economy. Table of Contents In recent years, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management s attention and resources. If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Our directors, executive officers and principal stockholders and their respective affiliates will continue to have substantial influence over us after this offering and could delay or prevent a change in corporate control. After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately 58% of our outstanding common stock, assuming no exercise of the underwriters option to purchase additional shares of our common stock in this offering. As a result, these stockholders, acting together, would have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by: delaying, deferring or preventing a change in corporate control; impeding a merger, consolidation, takeover or other business combination involving us; or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us. Future sales of shares by existing stockholders could cause our stock price to decline. If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of December 31, 2009, upon the completion of this offering, we will have outstanding 36,297,532 shares of common stock, assuming no exercise of outstanding options and warrants, and no exercise of the underwriters option to purchase additional shares. Of these shares, 6.4 million shares of common stock, plus any shares sold pursuant to the underwriters option to purchase additional shares, will be immediately freely Table of Contents tradable, without restriction, in the public market. Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated may, in their sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to this offering expire and based on shares outstanding as of December 31, 2009, an additional 29.9 million shares will be eligible for sale in the public market. In addition, (i) the 4.5 million shares subject to restricted stock units, (ii) the 0.7 million shares subject to outstanding options under our 1997 Long-Term Incentive and Stock Option Plan, 2000 Stock Plan and 2002 Stock Plan, (iii) the 5.7 million shares reserved for future issuance under our 2010 Equity Incentive Award Plan and our Employee Stock Purchase Plan and (iv) the 0.7 million shares remaining available for issuance under our 2002 Stock Plan, that will become available for issuance under our 2010 Equity Incentive Award Plan, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially. Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment. The assumed initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate substantial dilution of $8.96 in net tangible book value per share from the price you paid. In addition, following this offering, purchasers in the offering will have contributed approximately 10% of the total consideration paid by stockholders to us to purchase shares of our common stock. In addition, if the underwriters exercise their option to purchase additional shares, outstanding options and warrants are exercised or restricted stock units vest, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section titled Dilution. We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock. Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return. We intend to use the net proceeds from this offering for working capital, capital expenditures and other general corporate purposes. We may also use a portion of the net proceeds to repay our credit facility or acquire complementary businesses, products or technologies. We have not allocated the net proceeds from this offering for any specific purposes. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline. Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management. Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect prior to the completion of this offering will contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions will include: a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; Table of Contents the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror; a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror s own slate of directors or otherwise attempting to obtain control of us. We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. For a description of our capital stock, see the section titled Description of Capital Stock. We may be unable to raise additional capital to fund our future operations, and any future financings or acquisitions could result in substantial dilution to existing stockholders. We may need to raise additional capital to fund operations in the future. There is no guarantee that we will be able to raise additional equity or debt funding when or if it is required. The terms of any financing, if available, could be unfavorable to us and our stockholders and could result in substantial dilution to the equity and voting interests of our stockholders. Any failure to obtain financing when and as required could force us to curtail our operations which would harm our business. We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future. Table of Contents

parsed_sections/risk_factors/2010/CDXS_codexis_risk_factors.txt ADDED Viewed

The diff for this file is too large to render. See raw diff

parsed_sections/risk_factors/2010/CELH_celsius_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our securities involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before investing in our securities. If any of the events anticipated by the risks described below occur, our results of operations and financial conditions could be adversely affected which could result in a decline in the market price of our securities , causing you to lose all of part of your investment. Risk Factors Relating to Our Business We have a limited operating history with significant losses and expect losses to continue for the foreseeable future. The Company was incorporated in the State of Nevada on April 26, 2005 under the name Vector Ventures Corp and did not have any business operations until it acquired Elite FX, Inc., a Florida corporation, by reverse merger in January 2007. It is difficult to evaluate our business future and prospects as we are a young company with a limited operating history. Our future operating results will depend on many factors, both in and out of our control, including the ability to increase and sustain demand for and acceptance of our products, the level of our competition, and our ability to attract and maintain key management and employees. Elite FX, Inc. incurred operating losses from its inception in 2004 to our acquisition in January 2007. We have incurred losses since the acquisition and launching our own commercial operations. We have yet to establish any history of profitable operations. We have incurred an operating loss during the first nine months ending September 30, 2009 of $5.2 million. As a result, at September 30, 2009, we had an accumulated deficit of $16.7 million. Our revenues have not been sufficient to sustain our operations. We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our profitability will require the successful commercialization of our current Celsius product line and any future products we develop. No assurances can be given when this will occur or that we will ever be profitable. We may require additional capital in the future, which may not be available on favorable terms or at all. We believe that the net proceeds of this offering, together with anticipated revenues from operations, will enable us to fund our operations and business plan for the next 18 months or until we become cash flow positive. However, there is no assurance that our assumptions as to our company s capital needs will be correct and that we will not need to raise additional financing either after or prior to the end of such 18 month period or until we become cash flow positive. We anticipate that any such additional funds would be raised through equity or debt financings. In addition, we may enter into one or more revolving credit facilities or term loan facilities with one or more syndicates of lenders. It is possible that equity or debt financing will not be available to when we seek it. Such equity or debt financing, if available, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, the interest of existing shareholders in our company may be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing shareholders. If we cannot obtain adequate capital when needed on reasonable terms, we may not be able to fully implement our business plan, and our business, results of operations and financial condition would be adversely affected. We rely on third party co-packers to manufacture our products. If we are unable to maintain good relationships with our co-packers and/or their ability to manufacture our products becomes constrained or unavailable to us, our business could suffer. We do not directly manufacture our products, but instead outsource such manufacturing to established third party co-packers. These third party co-packers may not be able to fulfill our demand as it arises, could begin to charge rates that make using their services cost inefficient or may simply not be able to or willing to provide their services to us on a timely basis or at all. In the event of any disruption or delay, whether caused by a rift in our relationship or the inability of our co-packers to manufacture our products as required, we would need to secure the services of alternative co-packers. We may be unable to procure alternative packing facilities at commercially reasonable rates and/or within a reasonably short time period and any such transition could be costly. In such case, our business, financial condition and results of operations would be adversely affected. Table of Contents We rely on distributors to distribute our products in the DSD sales channel. If we are unable to secure such distributors and/or we are unable to maintain good relationships with our existing distributors, our business could suffer. We distribute Celsius in the DSD sales channel by entering into agreements with direct-to-store delivery distributors having established sales, marketing and distribution organizations. Many of our distributors are affiliated with and manufacture and/or distribute other beverage products. In many cases, such products compete directly with our products. The marketing efforts of our distributors are important for our success. If Celsius proves to be less attractive to our distributors and/or if we fail to attract distributors, and/or our distributors do not market and promote our products with greater focus in preference to the products of our competitors, our business, financial condition and results of operations could be adversely affected. Our customers are material to our success. If we are unable to maintain good relationships with our existing customers, our business could suffer. Unilateral decisions could be taken by our distributors, grocery chains, convenience chains, drug stores, nutrition stores, mass merchants, club warehouses and other customers to discontinue carrying all or any of our products that they are carrying at any time, which could cause our business to suffer. Increases in cost or shortages of raw materials or increases in costs of co-packing could harm our business. The principal raw materials used by us are flavors and ingredient blends as well as aluminum cans, the prices of which are subject to fluctuations. We are uncertain whether the prices of any of the above or any other raw materials or ingredients we utilize will rise in the future and whether we will be able to pass any of such increases on to our customers. We do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials. In addition, some of these raw materials, such as our distinctive sleek 12 ounce can, are available from a single or a limited number of suppliers. As alternative sources of supply may not be available, any interruption in the supply of such raw materials might materially harm us. Our failure to accurately estimate demand for our products could adversely affect our business and financial results. We may not correctly estimate demand for our products. If we materially underestimate demand for our products and are unable to secure sufficient ingredients or raw materials, we might not be able to satisfy demand on a short-term basis, in which case our business, financial condition and results of operations could be adversely affected. We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual property rights or any claims that we are infringing upon the rights of others may adversely affect our competitive position. Our success depends, in large part, on our ability to protect our current and future brands and products and to defend our intellectual property rights. We cannot be sure that trademarks will be issued with respect to any future trademark applications or that our competitors will not challenge, invalidate or circumvent any existing or future trademarks issued to, or licensed by, us. Our products are manufactured using our proprietary blends of ingredients. These blends are created by third-party suppliers to our specifications and then supplied to our co-packers. Although all of the third parties in our supply and manufacture chain execute confidentiality agreements, there can be no assurance that our trade secrets, including our proprietary ingredient blends will not become known to competitors. We believe that our competitors, many of whom are more established, and have greater financial and personnel resources than we do, may be able to replicate or reverse engineer our processes, brands, flavors, or our products in a manner that could circumvent our protective safeguards. Therefore, we cannot give you any assurance that our confidential business information will remain proprietary. Any such loss of confidentiality could diminish or eliminate any competitive advantage provided by our proprietary information. We may incur material losses as a result of product recall and product liability. We may be liable if the consumption of any of our products causes injury, illness or death. We also may be required to recall some of our products if they become contaminated or are damaged or mislabeled. A significant product liability judgment against us, or a widespread product recall, could have a material adverse effect on our business, financial condition and results of operations. The amount of the insurance we carry is limited, and that insurance is subject to certain exclusions and may or may not be adequate. We may not be able to develop successful new products, which could impede our growth and cause us to sustain future losses. Part of our strategy is to increase our sales through the development of additional products. We cannot assure you that we will be able to develop, market, sell and distribute additional products that will enjoy market acceptance. The failure to develop new products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Table of Contents Our lack of product diversification and inability to timely introduce new or alternative products could cause us to cease operations. Our business is centered on Celsius . The risks associated with focusing on a limited product line are substantial. If consumers do not accept our products or if there is a general decline in market demand for, or any significant decrease in, the consumption of functional beverages, we are not financially or operationally capable of introducing alternative products within a short time frame. As a result, such lack of acceptance or market demand decline could cause us to cease operations. We are dependent on our key executives and employees and the loss of any of their services could materially adversely affect us which may have a material adverse effect on our Company. Our future success will depend substantially upon the abilities of, and personal relationships developed by a limited number of key executives and employees, including Stephen C. Haley, our Chief Executive Officer, President and Chairman of the Board, Geary W. Cotton, our Chief Financial Officer and Irina Lorenzi, our Innovations Vice President. The loss of the services of Mr. Haley, Mr. Cotton, Ms. Lorenzi or any other key employee could materially adversely affect our business and our prospects for the future. We do not have key person insurance on the lives of such individuals and the loss of any of their services could materially adversely affect us. We are dependent on our ability to attract and retain qualified technical, sales and managerial personnel. Our future success depends in part on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel in the beverage industry is intense and we may not be able to retain our key managerial, sales and technical employees or attract and retain additional highly qualified technical, sales and managerial personnel in the future. Any inability to attract and retain the necessary technical, sales and managerial personnel could materially adversely affect us. The FDA has not passed on the efficacy of our products or the accuracy of any claim we make related to our products. Although five independent clinical studies have been conducted relating to the calorie-burning and related effects of our products, the results of these studies have not been submitted to or reviewed by the FDA. Further, the FDA has not passed on the efficacy of any of our products nor has it reviewed or passed on any claims we make related to our products, including the claim that our products aid consumers in burning calories or enhancing their metabolism. Risk Factors Relating to Our Industry We are subject to significant competition in the beverage industry. The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, distribution channel penetration, development of new products and flavors and marketing campaigns. Our products compete with a wide range of drinks produced by a relatively large number of manufacturers, most of which have substantially greater financial, marketing and distribution resources and name recognition than we do. Important factors affecting our ability to compete successfully include the taste and flavor of our products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing. Our products compete with all liquid refreshments and with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers, such as The Coca Cola Company, Dr. Pepper Snapple Group, PepsiCo, Inc., Nestle, Waters North America, Inc., Hansen Natural Corp. and Red Bull. We also compete with companies that are smaller or primarily local in operation. Our products also compete with private label brands such as those carried by supermarket chains, convenience store chains, drug store chains, mass merchants and club warehouses. There can be no assurance that we will compete successfully in the functional beverage industry. The failure to do so would materially adversely affect our business, financial condition and results of operations. We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success and significant marketing and advertising will be needed to achieve and sustain brand recognition. Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers. Our business depends on acceptance by our independent distributors of our brand as one that has the potential to provide incremental sales growth rather than reduce distributors existing beverage sales. The development of brand awareness and market acceptance is likely to require significant marketing and advertising expenditures. Even if we are able to engage in such marketing and advertising efforts, there can be no assurance that Celsius will achieve and maintain satisfactory levels of acceptance by independent distributors and retail consumers. Any failure of Celsius brand to maintain or increase acceptance or market penetration would likely have a material adverse affect on business, financial condition and results of operations. Table of Contents Our sales are affected by seasonality. As is typical in the beverage industry, our sales are seasonal. Our highest sales volumes generally occur in the second and third quarters, which correspond to the warmer months of the year in our major markets. Consumer demand for our products is also affected by weather conditions. Cool, wet spring or summer weather could result in decreased sales of our beverages and could have an adverse effect on our results of operations. Our business is subject to many regulations and noncompliance is costly. The production, marketing and sale of our beverage products are subject to the rules and regulations of various federal, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial conditions and operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have an adverse effect on our business, financial condition and results of operations. Risks Relating to our Common Stock and Warrants and the Offering There are a large number of shares underlying our convertible promissory notes, convertible preferred stock and warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock. As of February 5, 2010, we had 12,029,519 shares of common stock issued and outstanding. As of the same date, we also had convertible promissory notes outstanding that may be converted into an estimated 792,599 shares of our common stock, 2,063,125 shares of common stock issuable upon conversion of our issued and outstanding Series A preferred stock and 1,582,951 shares of common stock issuable upon the exercise of warrants and stock options. In addition, we will issue warrants to purchase 900,000 shares of common stock in this offering. Most, if not all of these shares may be sold into the market place currently. The sale of these shares may adversely affect the market price of our common stock and warrants. Our executive officers, directors and principal shareholders own a significant percentage of our company and will be able to exercise significant influence over our company. Immediately following this offering, our executive officers and directors and principal shareholders collectively will beneficially own approximately 49.6% of the total voting power of our outstanding voting capital stock. These shareholders will be able to determine the composition of our board of directors, will retain the voting power to approve all matters requiring shareholder approval and will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of the common stock or prevent our shareholders from realizing a premium over the market prices for their shares of common stock. Our board of directors will have broad discretion over the application of a significant portion of the net proceeds of the offering. Approximately $ 4.3 million or 31% of the estimated net proceeds of the offering has been allocated to general corporate purposes, including working capital. Accordingly, our board of directors will have broad discretion over the allocation of these proceeds. We cannot guarantee the existence of an established public trading market. Although our common stock and warrants will be listed on the Nasdaq Capital Market upon completion of this offering under the symbols CELH and CELHW , respectively, and our common stock currently trades on the OTC Bulletin Board, a regular trading market for our securities may not be sustained in the future. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the Nasdaq Capital Market. Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for the Nasdaq Capital Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our securities will be influenced by a number of factors, including: the issuance of new equity securities pursuant to an offering; changes in interest rates; Table of Contents competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; variations in quarterly operating results; change in financial estimates by securities analysts; the depth and liquidity of the market for our common stock; investor perceptions of our company and the aquaculture industry generally; and general economic and other national conditions. Because we do not intend to pay dividends, shareholders will benefit from an investment in shares of our common stock only if our shares appreciate in value. We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our future cash flows, if any, to finance the operation and growth of our business and, therefore, do not expect to pay any cash dividends in the foreseeable future. As a result, shareholders will benefit from an investment in shares of our common stock only if it appreciates in value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which shareholders have purchased their shares. Furthermore, our current credit facility restricts the amount of dividends we may pay to our shareholders. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Because the exemptions from qualification in certain states for resales of warrants and for issuances of common stock by the issuer upon exercise of a warrant may be different, a warrant may be held by a holder in a state where an exemption is not available for issuance of common stock upon an exercise and the holder will be precluded from exercise of the warrant. We expect to be listed on a national securities exchange, which would provide an exemption from registration in every state for the issuance of common stock upon exercise of the warrant. Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants at that time. No warrant held by an investor will be exercisable and we will not be obligated to issue common stock unless at the time such holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current (or an exemption from registration is available) and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants (and an exemption from registration is not available), holders will be unable to exercise their warrants and we will not be required to net cash settle any such warrant exercise. If we are unable to issue the shares of common stock upon exercise of the warrants by an investor because there is no current prospectus relating to the common stock issuable upon exercise of the warrant (and an exemption from registration is not available) or the common stock has not been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants, the warrants will not expire until ten days after the date we are first able to issue the shares of common stock. Nevertheless, because an investor may not be able to exercise the warrants at the most advantageous time, the warrants held by an investor may have no value, the market for such warrants may be limited and such warrants may expire worthless. FORWARD -LOOKING STATEMENTS Information included in this prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This information involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may , should , expect , anticipate , estimate , believe , intend or project or the negative of these words or other variations on these words or comparable terminology. The

parsed_sections/risk_factors/2010/CFFN_capitol_risk_factors.txt ADDED Viewed

The diff for this file is too large to render. See raw diff

parsed_sections/risk_factors/2010/CHRD_chord_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS You should carefully consider the risks described below before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. Risks Related to the Oil and Natural Gas Industry and Our Business A substantial or extended decline in oil and, to a lesser extent, natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments. The price we receive for our oil and, to a lesser extent, natural gas, heavily influences our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include the following: worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas; the actions of the Organization of Petroleum Exporting Countries, or OPEC; the price and quantity of imports of foreign oil and natural gas; political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; the level of global oil and natural gas exploration and production; the level of global oil and natural gas inventories; localized supply and demand fundamentals and transportation availability; weather conditions and natural disasters; domestic and foreign governmental regulations; speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts; price and availability of competitors supplies of oil and natural gas; technological advances affecting energy consumption; and the price and availability of alternative fuels. Substantially all of our production is sold to purchasers under short-term (less than 12-month) contracts at market based prices. Lower oil and natural gas prices will reduce our cash flows, borrowing ability and the present value of our reserves. See also Our exploration, development and exploitation projects require substantial capital expenditures. We may be unable to obtain needed capital or financing on satisfactory terms, which could lead to expiration of our leases or a decline in our oil and natural gas reserves. Lower oil and natural gas prices may also reduce the amount of oil and natural gas that we can produce economically and may affect our proved reserves. See also The present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated oil and natural gas reserves. Table of Contents Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations. Our future financial condition and results of operations will depend on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit drilling locations or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see Our estimated proved reserves are based on many assumptions that may turn out to be inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel our scheduled drilling projects, including the following: shortages of or delays in obtaining equipment and qualified personnel; facility or equipment malfunctions; unexpected operational events; pressure or irregularities in geological formations; adverse weather conditions, such as blizzards and ice storms; reductions in oil and natural gas prices; delays imposed by or resulting from compliance with regulatory requirements; proximity to and capacity of transportation facilities; title problems; and limitations in the market for oil and natural gas. Our estimated proved reserves are based on many assumptions that may turn out to be inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this prospectus. See Business Our Operations for information about our estimated oil and natural gas reserves and the PV-10 and Standardized Measure of discounted future net revenues as of December 31, 2009. In order to prepare our estimates, we must project production rates and the timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Although the reserve information contained herein is reviewed by independent reserve engineers, estimates of oil and natural gas reserves are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are Table of Contents beyond our control. Due to the limited production history of our undeveloped acreage, the estimates of future production associated with such properties may be subject to greater variance to actual production than would be the case with properties having a longer production history. The present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated oil and natural gas reserves. You should not assume that the present value of future net revenues from our proved reserves is the current market value of our estimated oil and natural gas reserves. For the years ended December 31, 2007 and 2008, we based the estimated discounted future net revenues from our proved reserves on prices and costs in effect on the day of the estimate in accordance with previous SEC requirements. In accordance with new SEC requirements for the year ended December 31, 2009, we have based the estimated discounted future net revenues from our proved reserves on the 12-month unweighted arithmetic average of the first-day-of-the-month price for the preceding twelve months without giving effect to derivative transactions. Actual future net revenues from our oil and natural gas properties will be affected by factors such as: actual prices we receive for oil and natural gas; actual cost of development and production expenditures; the amount and timing of actual production; and changes in governmental regulations or taxation. The timing of both our production and our incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing and amount of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net revenues may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Actual future prices and costs may differ materially from those used in the present value estimates included in this prospectus. If oil prices decline by $1.00 per Bbl, then our PV-10 as of December 31, 2009 would decrease approximately $4.9 million. If natural gas prices decline by $0.10 per Mcf, then our PV-10 as of December 31, 2009 would decrease approximately $0.3 million. Our business is difficult to evaluate because we have a limited operating history. In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance. We were formed in February 2007 and, as a result, we have a limited operating history. We face challenges and uncertainties in financial planning as a result of the unavailability of historical data and uncertainties regarding the nature, scope and results of our future activities. New companies must develop successful business relationships, establish operating procedures, hire staff, install management information and other systems, establish facilities and obtain licenses, as well as take other measures necessary to conduct their intended business activities. We may not be successful in implementing our business strategies or in completing the development of the infrastructure necessary to conduct our business as planned. In the event that our development plan is not completed or is delayed, our operating results will be adversely affected and our operations will differ materially from the activities described in this prospectus. As a result of industry factors or factors relating specifically to us, we may have to change our methods of conducting business, which may cause a material adverse effect on our results of operations and financial condition. Table of Contents Part of our strategy involves drilling in existing or emerging shale plays using some of the latest available horizontal drilling and completion techniques. The results of our planned exploratory drilling in these plays are subject to drilling and completion technique risks and drilling results may not meet our expectations for reserves or production. As a result, we may incur material write-downs and the value of our undeveloped acreage could decline if drilling results are unsuccessful. Operations in the Bakken and the Three Forks formations involve utilizing the latest drilling and completion techniques as developed by ourselves and our service providers in order to maximize cumulative recoveries and therefore generate the highest possible returns. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. Our experience with horizontal drilling utilizing the latest drilling and completion techniques specifically in the Bakken and Three Forks formations is limited. Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems and limited takeaway capacity or otherwise, and/or natural gas and oil prices decline, the return on our investment in these areas may not be as attractive as we anticipate and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. Our exploration, development and exploitation projects require substantial capital expenditures. We may be unable to obtain needed capital or financing on satisfactory terms, which could lead to expiration of our leases or a decline in our oil and natural gas reserves. Our exploration and development activities are capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. Our cash flows used in investing activities were $47.4 million related to capital and exploration expenditures for the year ended December 31, 2009. Our capital expenditure budget for 2010 is approximately $220 million, with approximately $179 million allocated for drilling and completion operations. To date, our capital expenditures have been financed with capital contributions from EnCap and other private investors, borrowings under our revolving credit facility and net cash provided by operating activities. DeGolyer and MacNaughton projects that we will incur capital costs in excess of $113 million in the next three years to develop the proved undeveloped reserves in the Williston Basin covered by its December 31, 2009 reserve report. Because these costs cover less than 12% of our total potential drilling locations, we will be required to generate or raise multiples of this amount of capital to develop all of our potential drilling locations should we elect to do so. The actual amount and timing of our future capital expenditures may differ materially from our estimates as a result of, among other things, commodity prices, actual drilling results, the availability of drilling rigs and other services and equipment, and regulatory, technological and competitive developments. A significant improvement in product prices could result in an increase in our capital expenditures. We intend to finance our future capital expenditures primarily through cash flows provided by operating activities, borrowings under our revolving credit facility and net proceeds from this offering; however, our financing needs may require us to alter or increase our capitalization substantially through the issuance of debt or additional equity securities or the sale of non-strategic assets. The issuance of additional debt may require that a portion of our cash flows provided by operating activities be used for the payment of principal and interest on our debt, thereby reducing our ability to use cash flows to fund working capital, capital expenditures and acquisitions. The issuance of additional equity securities could have a dilutive effect on the value of your common stock. In addition, upon the issuance of certain debt securities (other than on a borrowing base Table of Contents redetermination date), our borrowing base under our revolving credit facility will be automatically reduced by an amount equal to 25% of the aggregate principal amount of such debt securities. Our cash flows provided by operating activities and access to capital are subject to a number of variables, including: our proved reserves; the level of oil and natural gas we are able to produce from existing wells; the prices at which our oil and natural gas are sold; the costs of developing and producing our oil and natural gas production; our ability to acquire, locate and produce new reserves; the ability and willingness of our banks to lend; and our ability to access the equity and debt capital markets. If the borrowing base under our revolving credit facility or our revenues decrease as a result of lower oil or natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. If cash generated by operations or cash available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our drilling locations, which in turn could lead to a possible expiration of our leases and a decline in our oil and natural gas reserves, and could adversely affect our business, financial condition and results of operations. If oil and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas properties. We review our proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties, which may result in a decrease in the amount available under our revolving credit facility. A write-down constitutes a non-cash charge to earnings. We may incur impairment charges in the future, which could have a material adverse effect on our ability to borrow under our revolving credit facility and our results of operations for the periods in which such charges are taken. We will not be the operator on all of our drilling locations, and, therefore, we will not be able to control the timing of exploration or development efforts, associated costs, or the rate of production of any non-operated assets. We expect that we will not be the operator on approximately 48% of our identified gross drilling locations (approximately 18% of our identified net drilling locations). As we carry out our exploration and development programs, we may enter into arrangements with respect to existing or future drilling locations that result in a greater proportion of our locations being operated by others. As a result, we may have limited ability to exercise influence over the operations of the drilling locations operated by our partners. Dependence on the operator could prevent us from realizing our target returns for those locations. The success and timing of exploration and development activities operated by our partners will depend on a number of factors that will be largely outside of our control, including: the timing and amount of capital expenditures; the operator s expertise and financial resources; approval of other participants in drilling wells; Table of Contents selection of technology; and the rate of production of reserves, if any. This limited ability to exercise control over the operations of some of our drilling locations may cause a material adverse effect on our results of operations and financial condition. Substantially all of our producing properties and operations are located in the Williston Basin region, making us vulnerable to risks associated with operating in one major geographic area. As of December 31, 2009, approximately 99% of our proved reserves and approximately 96% of our production were located in the Williston Basin in northeastern Montana and northwestern North Dakota. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells caused by transportation capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, plant closures for scheduled maintenance or interruption of transportation of oil or natural gas produced from the wells in this area. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as the Williston Basin, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations. Our business depends on oil and natural gas gathering and transportation facilities, most of which are owned by third parties. The marketability of our oil and natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties. The unavailability of, or lack of, available capacity on these systems and facilities could result in the shut-in of producing wells or the delay, or discontinuance of, development plans for properties. See also Delays and interruptions of production from our wells due to marketing and transportation constraints in the Williston Basin could cause significant fluctuations in our realized oil and natural gas prices. We generally do not purchase firm transportation on third party facilities and, therefore, the transportation of our production can be interrupted by those having firm arrangements. Federal and state regulation of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce, gather and transport our oil and natural gas. The disruption of third-party facilities due to maintenance and/or weather could also negatively impact our ability to market and deliver our products. We have no control over when or if such facilities are restored or what prices will be charged. A total shut-in of production could materially affect us due to a lack of cash flow, and if a substantial portion of the production is hedged at lower than market prices, those financial hedges would have to be paid from borrowings absent sufficient cash flow. Delays and interruptions of production from our wells due to marketing and transportation constraints in the Williston Basin could cause significant fluctuations in our realized oil and natural gas prices. The Williston Basin crude oil marketing and transportation environment has historically been characterized by periods when oil production has surpassed local transportation and refining capacity, resulting in substantial discounts in the price received for crude oil versus prices quoted for West Texas Intermediate (WTI) crude oil. For example, the difference between the WTI crude oil price and the Tesoro North Dakota Sweet oil price as of December 31, 2008 and 2009 was $14.80 per Bbl and $10.29 per Bbl, respectively. Such fluctuations and discounts could have a material adverse effect on our financial condition and results of operations. Table of Contents The development of our proved undeveloped reserves in the Williston Basin and other areas of operation may take longer and may require higher levels of capital expenditures than we currently anticipate. Therefore, our undeveloped reserves may not be ultimately developed or produced. Approximately 58% of our total proved reserves were classified as proved undeveloped as of December 31, 2009. Development of these reserves may take longer and require higher levels of capital expenditures than we currently anticipate. Delays in the development of our reserves or increases in costs to drill and develop such reserves will reduce the PV-10 value of our estimated proved undeveloped reserves and future net revenues estimated for such reserves and may result in some projects becoming uneconomic. In addition, delays in the development of reserves could cause us to have to reclassify our proved reserves as unproved reserves. Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of operations. Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and therefore our cash flows and income, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, exploit, find or acquire additional reserves to replace our current and future production at acceptable costs. If we are unable to replace our current and future production, the value of our reserves will decrease, and our business, financial condition and results of operations would be adversely affected. The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans within our budget and on a timely basis. Shortages or the high cost of drilling rigs, equipment, supplies, personnel or oilfield services could delay or adversely affect our development and exploration operations or cause us to incur significant expenditures that are not provided for in our capital budget, which could have a material adverse effect on our business, financial condition or results of operations. Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production. Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends, in substantial part, on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third-parties. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells due to lack of a market or inadequacy or unavailability of crude oil or natural gas pipelines or gathering system capacity. If our production becomes shut-in for any of these or other reasons, we would be unable to realize revenue from those wells until other arrangements were made to deliver the products to market. We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations. Additionally, we may not be insured for, or our insurance may be inadequate to protect us against, these risks. We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and Table of Contents natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of: environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination; abnormally pressured formations; mechanical difficulties, such as stuck oilfield drilling and service tools and casing collapse; personal injuries and death; and natural disasters. Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to us as a result of: injury or loss of life; damage to and destruction of property, natural resources and equipment; pollution and other environmental damage; regulatory investigations and penalties; suspension of our operations; and repair and remediation costs. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations. Drilling locations that we decide to drill may not yield oil or natural gas in commercially viable quantities. We describe some of our drilling locations and our plans to explore those drilling locations in this prospectus. Our drilling locations are in various stages of evaluation, ranging from a location which is ready to drill to a location that will require substantial additional interpretation. There is no way to predict in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in sufficient quantities to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive hydrocarbon bearing formation or experience mechanical difficulties while drilling or completing the well, resulting in a reduction in production from the well or abandonment of the well. If we drill additional wells that we identify as dry holes in our current and future drilling locations, our drilling success rate may decline and materially harm our business. We cannot assure you that the analogies we draw from available data from other wells, more fully explored locations or producing fields will be applicable to our drilling locations. Further, initial production rates reported by us or other operators in the Williston Basin may not be indicative of future or long-term production rates. In sum, the cost of drilling, completing and operating any well is often uncertain, and new wells may not be productive. We have incurred losses from operations during certain periods since our inception and may continue to do so in the future. We incurred net losses of $3.2 million and $5.5 million for the three months ended March 31, 2010 and 2009, respectively, $15.2 million and $34.4 million for the years ended December 31, 2009 and 2008, respectively, and $13.6 million in the period from February 26, 2007 (inception) through December 31, 2007. Our development of and participation in an increasingly larger number of drilling locations has required and will continue to require substantial capital expenditures. The uncertainty and risks described in this prospectus Table of Contents may impede our ability to economically find, develop, exploit and acquire oil and natural gas reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows provided by operating activities in the future. Our potential drilling location inventories are scheduled over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. In addition, we may not be able to raise the substantial amount of capital that would be necessary to drill a substantial portion of our potential drilling locations. Our management has identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. As of December 31, 2009, only 86 of our 469 specifically identified potential future gross drilling locations were attributed to proved undeveloped reserves. These potential drilling locations, including those without proved undeveloped reserves, represent a significant part of our growth strategy. Our ability to drill and develop these locations is subject to a number of uncertainties, including the availability of capital, seasonal conditions, regulatory approvals, oil and natural gas prices, costs and drilling results. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. Pursuant to a new SEC rule and guidance, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years of the date of booking. This new rule and guidance may limit our potential to book additional proved undeveloped reserves as we pursue our drilling program. Our acreage must be drilled before lease expiration, generally within three to five years, in order to hold the acreage by production. In the highly competitive market for acreage, failure to drill sufficient wells in order to hold acreage will result in a substantial lease renewal cost, or if renewal is not feasible, loss of our lease and prospective drilling opportunities. Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. As of December 31, 2009, we had leases representing 45,640 net acres expiring in 2010, 59,559 net acres expiring in 2011, and 31,642 net acres expiring in 2012. The cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. In addition, on certain portions of our acreage, third-party leases become immediately effective if our leases expire. As such, our actual drilling activities may materially differ from our current expectations, which could adversely affect our business. Our operations are subject to environmental and operational safety laws and regulations that may expose us to significant costs and liabilities. Our oil and natural gas exploration and production operations are subject to stringent and complex federal, state and local laws and regulations governing health and safety aspects of our operations, the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations that are applicable to our operations including the acquisition of a permit before conducting drilling or underground injection activities; the restriction of types, quantities and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from operations. Numerous governmental authorities, such as the U.S. Environmental Protection Agency, or the EPA, and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties; the imposition of investigatory or remedial obligations; and the issuance of injunctions limiting or preventing some or all of our operations. There is inherent risk of incurring significant environmental costs and liabilities in the performance of our operations due to our handling of petroleum hydrocarbons and wastes, because of air emissions and waste Table of Contents water discharges related to our operations, and as a result of historical industry operations and waste disposal practices. Under certain environmental laws and regulations, we could be subject to joint and several, strict liability for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination or if the operations were not in compliance with all applicable laws at the time those actions were taken. Private parties, including the owners of properties upon which our wells are drilled and facilities where our petroleum hydrocarbons or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, the risk of accidental spills or releases could expose us to significant liabilities that could have a material adverse effect on our financial condition or results of operations. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our own results of operations, competitive position or financial condition. We may not be able to recover some or any of these costs from insurance. Climate change laws and regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas that we produce while the physical effects of climate change could disrupt our production and cause us to incur significant costs in preparing for or responding to those effects. On December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth s atmosphere and other climatic changes. These findings by the EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. Consequently, the EPA proposed two sets of regulations that would require a reduction in emissions of greenhouse gases from motor vehicles and, also, could trigger permit review for greenhouse gas emissions from certain stationary sources. In addition, on October 30, 2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States beginning in 2011 for emissions occurring in 2010. On March 23, 2010, the EPA announced a proposal to expand its final rule on greenhouse gas emissions reporting to include owners and operators of onshore oil and natural gas production. If the proposed rule is finalized in its current form, monitoring those newly covered sources would commence on January 1, 2011. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations could require us to incur costs to reduce emissions of greenhouse gases associated with our operations or could adversely affect demand for the oil and natural gas we produce. Also, on June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, or ACESA, which would establish an economy-wide cap-and-trade program to reduce U.S. emissions of greenhouse gases including carbon dioxide and methane that may contribute to warming of the Earth s atmosphere and other climatic changes. ACESA would require a 17 percent reduction in greenhouse gas emissions from 2005 levels by 2020 and just over an 80 percent reduction of such emissions by 2050. Under this legislation, the EPA would issue a capped and steadily declining number of tradable emissions allowances to certain major sources of greenhouse gas emissions so that such sources could continue to emit greenhouse gases into the atmosphere. These allowances would be expected to escalate significantly in cost over time. The net effect of ACESA will be to impose increasing costs on the combustion of carbon-based fuels such as oil, refined petroleum products and natural gas. The U.S. Senate has begun work on its own legislation for restricting domestic greenhouse gas emissions and President Obama has indicated his support of legislation to reduce greenhouse gas emissions through an emission allowance system. Although it is not possible at this time to predict when the Senate may act on climate change legislation or how any bill passed by the Senate would be reconciled with ACESA, any future federal laws or implementing regulations that may be adopted to address greenhouse gas emissions could require us to incur increased operating costs and could adversely affect demand for the oil and natural gas we produce. Table of Contents Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our exploration and production operations. Significant physical effects of climate change could also have an indirect affect on our financing and operations by disrupting the transportation or process-related services provided by midstream companies, service companies or suppliers with whom we have a business relationship. We may not be able to recover through insurance some or any of the damages, losses, or costs that may result from potential physical effects of climate change. Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. The U.S. Congress is considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Hydraulic fracturing is an important and commonly used process in the completion of unconventional oil and natural gas wells in shale and tight sand formations. This process involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and natural gas production. Sponsors of these bills, which are currently pending in the Energy and Commerce Committee and the Environmental and Public Works Committee of the House of Representatives and Senate, respectively, have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. These bills, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business. Moreover, the EPA announced on March 18, 2010 that it has allocated $1.9 million in 2010 and has requested funding in fiscal year 2011 for conducting a comprehensive research study on the potential adverse impacts that hydraulic fracturing may have on water quality and public health. Consequently, even if these bills are not adopted this year, the performance of the hydraulic fracturing study by the EPA could spur further action at a later date towards federal legislation and regulation of hydraulic fracturing activities. Competition in the oil and natural gas industry is intense, making it more difficult for us to acquire properties, market oil and natural gas and secure trained personnel. Our ability to acquire additional drilling locations and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing equipment and trained personnel. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to pay more for productive oil and natural gas properties and exploratory drilling locations or to identify, evaluate, bid for and purchase a greater number of properties and locations than our financial or personnel resources permit. Furthermore, these companies may also be better able to withstand the financial pressures of unsuccessful drilling attempts, sustained periods of volatility in financial markets and generally adverse global and industry-wide economic conditions, and may be better able to absorb the burdens resulting from changes in relevant laws and regulations, which would adversely affect our competitive position. In addition, companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased over the past few years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which could have a material adverse effect on our business. Table of Contents The loss of senior management or technical personnel could adversely affect our operations. To a large extent, we depend on the services of our senior management and technical personnel. The loss of the services of our senior management or technical personnel, including Thomas B. Nusz, our Chairman, President and Chief Executive Officer, and Taylor L. Reid, our Executive Vice President and Chief Operating Officer, could have a material adverse effect on our operations. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals. Seasonal weather conditions adversely affect our ability to conduct drilling activities in some of the areas where we operate. Oil and natural gas operations in the Williston Basin are adversely affected by seasonal weather conditions. In the Williston Basin, drilling and other oil and natural gas activities cannot be conducted as effectively during the winter months. Severe winter weather conditions limit and may temporarily halt our ability to operate during such conditions. These constraints and the resulting shortages or high costs could delay or temporarily halt our operations and materially increase our operating and capital costs. Our derivative activities could result in financial losses or could reduce our income. To achieve more predictable cash flows and to reduce our exposure to adverse fluctuations in the prices of oil and natural gas, we currently, and may in the future, enter into derivative arrangements for a portion of our oil and natural gas production, including collars and fixed-price swaps. We have not designated any of our derivative instruments as hedges for accounting purposes and record all derivative instruments on our balance sheet at fair value. Changes in the fair value of our derivative instruments are recognized in earnings. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our derivative instruments. Derivative arrangements also expose us to the risk of financial loss in some circumstances, including when: production is less than the volume covered by the derivative instruments; the counter-party to the derivative instrument defaults on its contract obligations; or there is an increase in the differential between the underlying price in the derivative instrument and actual prices received. In addition, these types of derivative arrangements limit the benefit we would receive from increases in the prices for oil and natural gas and may expose us to cash margin requirements. The adoption of derivatives legislation by Congress could have an adverse impact on our ability to hedge risks associated with our business. We enter into derivative contracts in order to hedge a portion of our oil production. Congress is currently considering legislation to impose restrictions on certain transactions involving derivatives, which could affect the use of derivatives in hedging transactions. ACESA contains provisions that would prohibit private energy commodity derivative and hedging transactions. ACESA would expand the power of the Commodity Futures Trading Commission, or the CFTC, to regulate derivative transactions related to energy commodities, including oil and natural gas, and to mandate clearance of such derivative contracts through registered derivative clearing organizations. Under ACESA, the CFTC s expanded authority over energy derivatives would terminate upon the adoption of general legislation covering derivative regulatory reform. The CFTC is considering whether to set limits on trading and positions in commodities with finite supply, particularly energy commodities, such as crude oil, natural gas and other energy products. The CFTC also is evaluating whether position limits should be applied consistently across all markets and participants. Separately, two committees of the House of Representatives, the Financial Services and Agriculture Committees, acted on October 15, 2009 and October 21, 2009, respectively, to adopt legislation that would impose comprehensive regulation on the over-the-counter (OTC) derivatives marketplace. This legislation would subject swap dealers and major swap Table of Contents participants to substantial supervision and regulation, including capital standards, margin requirements, business conduct standards, and recordkeeping and reporting requirements. It also would require central clearing for transactions entered into between swap dealers or major swap participants, and would provide the CFTC with authority to impose position limits in the OTC derivatives markets. A major swap participant generally would be someone other than a dealer who maintains a substantial position in outstanding swaps other than swaps used for commercial hedging, or whose positions create substantial exposure to its counterparties or the system. Although it is not possible at this time to predict whether or when Congress may act on derivatives legislation or how any climate change bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may be adopted that subject us to additional capital or margin requirements relating to, or to additional restrictions on, our trading and commodity positions could have an adverse effect on our ability to hedge risks associated with our business or on the cost of our hedging activity. Increased costs of capital could adversely affect our business. Our business and operating results can be harmed by factors such as the availability, terms and cost of capital, increases in interest rates or a reduction in credit rating. Changes in any one or more of these factors could cause our cost of doing business to increase, limit our access to capital, limit our ability to pursue acquisition opportunities, reduce our cash flows available for drilling and place us at a competitive disadvantage. Recent and continuing disruptions and volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availability impacting our ability to finance our operations. We require continued access to capital. A significant reduction in the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results. Our revolving credit facility contains certain covenants that may inhibit our ability to make certain investments, incur additional indebtedness and engage in certain other transactions, which could adversely affect our ability to meet our future goals. Our revolving credit facility includes certain covenants that, among other things, restrict: our investments, loans and advances and the payment of dividends and other restricted payments; our incurrence of additional indebtedness; the granting of liens, other than liens created pursuant to the revolving credit facility and certain permitted liens; mergers, consolidations and sales of all or a substantial part of our business or properties; the hedging, forward sale or swap of our production of crude oil or natural gas or other commodities; the sale of assets (other than production sold in the ordinary course of business); and our capital expenditures. Our revolving credit facility requires us to maintain certain financial ratios, such as leverage ratios. All of these restrictive covenants may restrict our ability to expand or pursue our business strategies. Our ability to comply with these and other provisions of our revolving credit facility may be impacted by changes in economic or business conditions, results of operations or events beyond our control. The breach of any of these covenants could result in a default under our revolving credit facility, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed under our revolving credit facility, together with accrued interest, to be due and payable. If we were unable to repay such borrowings or interest, our lenders could proceed against their collateral. If the indebtedness under our revolving credit facility were to be accelerated, our assets may not be sufficient to repay in full such indebtedness. Table of Contents Our level of indebtedness may increase and reduce our financial flexibility. Upon the completion of this offering, we expect to have no indebtedness outstanding and will have a borrowing capacity of $70 million under our revolving credit facility. In the future, we may incur significant indebtedness in order to make future acquisitions or to develop our properties. Our level of indebtedness could affect our operations in several ways, including the following: a significant portion of our cash flows could be used to service our indebtedness; a high level of debt would increase our vulnerability to general adverse economic and industry conditions; the covenants contained in the agreements governing our outstanding indebtedness will limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing; our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; a high level of debt may make it more likely that a reduction in our borrowing base following a periodic redetermination could require us to repay a portion of our then-outstanding bank borrowings; and a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes. A high level of indebtedness increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance. General economic conditions, oil and natural gas prices and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital. In addition, our bank borrowing base is subject to periodic redeterminations. We could be forced to repay a portion of our bank borrowings due to redeterminations of our borrowing base. If we are forced to do so, we may not have sufficient funds to make such repayments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. The inability of one or more of our customers to meet their obligations to us may adversely affect our financial results. Our principal exposures to credit risk are through receivables resulting from the sale of our oil and natural gas production ($9.1 million in receivables at December 31, 2009), which we market to energy marketing companies, refineries and affiliates, advances to joint interest parties ($4.6 million at December 31, 2009), joint interest receivables ($1.3 million at December 31, 2009), and commodity derivatives contracts ($0.2 million at December 31, 2009). We are subject to credit risk due to the concentration of our oil and natural gas receivables with several significant customers. This concentration of customers may impact our overall credit risk since these entities may be similarly affected by changes in economic and other conditions. For the year ended December 31, 2008, sales to Tesoro Refining and Marketing Company and Texon L.P. accounted for approximately 57% and 14%, respectively, of our total sales. For the year ended December 31, 2009, sales to Tesoro Refining and Table of Contents Marketing Company and Texon L.P. accounted for approximately 32% and 30%, respectively, of our total sales. We do not require our customers to post collateral. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. Joint interest receivables arise from billing entities who own a partial interest in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we wish to drill. We have limited ability to control participation in our wells. In addition, our oil and natural gas derivative arrangements expose us to credit risk in the event of nonperformance by counterparties. We may be subject to risks in connection with acquisitions and the integration of significant acquisitions may be difficult. We periodically evaluate acquisitions of reserves, properties, prospects and leaseholds and other strategic transactions that appear to fit within our overall business strategy. The successful acquisition of producing properties requires an assessment of several factors, including: recoverable reserves; future oil and natural gas prices and their appropriate differentials; development and operating costs; and potential environmental and other liabilities. The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections may not always be performed on every well, and environmental problems are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. We often are not entitled to contractual indemnification for environmental liabilities and acquire properties on an as is basis. Significant acquisitions and other strategic transactions may involve other risks, including: diversion of our management s attention to evaluating, negotiating and integrating significant acquisitions and strategic transactions; challenge and cost of integrating acquired operations, information management and other technology systems and business cultures with those of ours while carrying on our ongoing business; difficulty associated with coordinating geographically separate organizations; and challenge of attracting and retaining personnel associated with acquired operations. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business. If our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. If we fail to realize the anticipated benefits of a significant acquisition, our results of operations may be lower than we expect. The success of a significant acquisition will depend, in part, on our ability to realize anticipated growth opportunities from combining the acquired assets or operations with those of ours. Even if a combination is successful, it may not be possible to realize the full benefits we may expect in estimated proved reserves, production volume, cost savings from operating synergies or other benefits anticipated from an acquisition or realize these benefits within the expected time frame. Anticipated benefits of an acquisition may be offset by operating losses relating to changes in commodity prices, or in oil and natural gas industry conditions, or by Table of Contents risks and uncertainties relating to the exploratory prospects of the combined assets or operations, or an increase in operating or other costs or other difficulties. If we fail to realize the benefits we anticipate from an acquisition, our results of operations may be adversely affected. We may incur losses as a result of title defects in the properties in which we invest. It is our practice in acquiring oil and gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. Prior to the drilling of an oil or gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may adversely impact our ability in the future to increase production and reserves. There is no assurance that we will not suffer a monetary loss from title defects or title failure. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. Risks Relating to the Offering and our Common Stock The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, an active liquid trading market for our common stock may not develop and our stock price may be volatile. Prior to this offering, our common stock was not traded on any market. An active and liquid trading market for our common stock may not develop or be maintained after this offering. Liquid and active trading markets usually result in less price volatility and more efficiency in carrying out investors purchase and sale orders. The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The initial public offering price will be negotiated between us, the selling stockholder and representatives of the underwriters, based on numerous factors which we discuss in the Underwriters section of this prospectus, and may not be indicative of the market price of our common stock after this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in the offering. The following factors could affect our stock price: our operating and financial performance and drilling locations, including reserve estimates; quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues; changes in revenue or earnings estimates or publication of reports by equity research analysts; speculation in the press or investment community; sales of our common stock by us, the selling stockholder or other stockholders, or the perception that such sales may occur; general market conditions, including fluctuations in commodity prices; and domestic and international economic, legal and regulatory factors unrelated to our performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Table of Contents Purchasers of common stock in this offering will experience immediate and substantial dilution of $7.60 per share. Based on an assumed initial public offering price of $14.00 per share, purchasers of our common stock in this offering will experience an immediate and substantial dilution of $7.60 per share in the pro forma as adjusted net tangible book value per share of common stock from the initial public offering price, and our pro forma as adjusted net tangible book value as of March 31, 2010 after giving effect to this offering would be $6.40 per share. See Dilution for a complete description of the calculation of net tangible book value. Because we are a relatively small company, the requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and distract management; and we may be unable to comply with these requirements in a timely or cost-effective manner. As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the requirements of the New York Stock Exchange, or the NYSE, with which we are not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to: institute a more comprehensive compliance function; design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; comply with rules promulgated by the NYSE; prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; establish new internal policies, such as those relating to disclosure controls and procedures and insider trading; involve and retain to a greater degree outside counsel and accountants in the above activities; and establish an investor relations function. In addition, we also expect that being a public company subject to these rules and regulations will require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our Audit Committee, and qualified executive officers. In connection with past audits and reviews of our financial statements, our independent registered public accounting firm identified and reported adjustments to management. Certain of such adjustments were deemed to be the result of internal control deficiencies that constitute material weaknesses in our internal control over financial reporting. If one or more material weaknesses persist or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected. Prior to the completion of this offering, we have been a private company with limited accounting personnel to adequately execute our accounting processes and other supervisory resources with which to address our internal control over financial reporting. As such, we have not maintained an effective control environment in that the design and execution of our controls has not consistently resulted in effective review and supervision by individuals with financial reporting oversight roles. The lack of adequate staffing levels resulted in insufficient time spent on review and approval of certain information used to prepare our financial statements. We have concluded that these control deficiencies constitute a material weakness in our control Table of Contents environment. A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiencies described above, at varying degrees of severity, contributed to the material weaknesses in the control environment as further described in Management s Discussion and Analysis of Financial Condition and Results of Operations -Internal Controls and Procedures. In response, we have begun the process of evaluating our internal control over financial reporting, although we are in the early phases of our review and will not complete our review until well after this offering is completed. We cannot predict the outcome of our review at this time. During the course of the review, we may identify additional control deficiencies, which could give rise to significant deficiencies and other material weaknesses in addition to the material weaknesses previously identified. Although remediation efforts are still in progress, management has taken steps to address the causes of our audit and interim period adjustments and to improve our internal control over financial reporting, including the implementation of new accounting processes and control procedures and the identification of gaps in our skills base and expertise of the staff required to meet the financial reporting requirements of a public company. We are not currently required to comply with the SEC s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future and comply with the certification and reporting obligations under Sections 302 and 404 of the Sarbanes-Oxley Act. Further, our remediation efforts may not enable us to remedy or avoid material weaknesses or significant deficiencies in the future. Any failure to remediate deficiencies and to develop or maintain effective controls, or any difficulties encountered in our implementation or improvement of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC, the NYSE or other regulatory authorities. Ineffective internal controls could also cause investors to lose confidence in our reported financial information. We do not intend to pay, and we are currently prohibited from paying, dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our stock appreciates. We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, we are currently prohibited from making any cash dividends pursuant to the terms of our revolving credit facility. Consequently, your only opportunity to achieve a return on your investment in us will be if the market price of our common stock appreciates, which may not occur, and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay. Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us. We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible securities. After the completion of this offering, we will Table of Contents have 92,215,295 outstanding shares of common stock. This number includes 42,000,000 shares that we and the selling stockholder are selling in this offering (assuming no exercise of the underwriters over-allotment option), which may be resold immediately in the public market. Following the completion of this offering and after certain distributions by the selling stockholder, the selling stockholder will own 47,154,296 shares, or approximately 51% of our total outstanding shares, and certain of our affiliates will own 2,750,142 shares, approximately 3% of our outstanding shares, all of which are restricted from immediate resale under the federal securities laws and are subject to the lock-up agreements between such parties and the underwriters described in Underwriters, but may be sold into the market in the future. We expect that the selling stockholder will be a party to a registration rights agreement with us which will require us to effect the registration of its shares in certain circumstances no earlier than the expiration of the lock-up period contained in the underwriting agreement entered into in connection with this offering. The holders of the remaining 310,856 shares and a small portion of shares owned by our affiliates which will be distributed to non-officer employees and other non-affiliates totaling up to approximately 575,000 shares, or approximately 0.6% of our outstanding shares, are not subject to lock-up agreements and, subject to compliance with Rule 144 under the Securities Act, may sell such shares into the public market. As soon as practicable after this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of 7,200,000 shares of our common stock issued or reserved for issuance under our stock incentive plan. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements, shares registered under this registration statement on Form S-8 will be available for resale immediately in the public market without restriction. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock. Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. Our certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including: a classified board of directors, so that only approximately one-third of our directors are elected each year; limitations on the removal of directors; and limitations on the ability of our stockholders to call special meetings and establish advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders. Delaware law prohibits us from engaging in any business combination with any interested stockholder, meaning generally that a stockholder who beneficially owns more than 15% of our stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors. The concentration of our capital stock ownership among our largest stockholders and their affiliates will limit your ability to influence corporate matters. Upon completion of this offering (assuming no exercise of the underwriters over-allotment option), we anticipate that OAS Holdco, the selling stockholder, will initially own up to approximately 54% of our outstanding common stock and EnCap and its affiliates will own approximately 61% of the selling stockholder (based on an assumed initial public offering price of $14.00 per share). While a portion of these shares will be distributed by OAS Holdco after the consummation of this offering as described under Corporate Table of Contents Reorganization LLC Agreement of OAS Holdco, we expect EnCap and its affiliates will continue to control OAS Holdco, and OAS Holdco will continue to own in excess of 94% of these shares after this distribution. Consequently, EnCap and its affiliates will continue to have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial. Furthermore, conflicts of interest could arise in the future between us, on the one hand, and EnCap and its affiliates, including its portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. EnCap is a private equity firm in the business of making investments in entities primarily in the U.S. oil and gas industry. As a result, EnCap s existing and future portfolio companies which it controls may compete with us for investment or business opportunities. These conflicts of interest may not be resolved in our favor. We have also renounced our interest in certain business opportunities. See Our amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects. Our amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects. Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by applicable law, we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may be from time to time presented to EnCap or its affiliates or any of their respective officers, directors, agents, shareholders, members, partners, affiliates and subsidiaries (other than us and our subsidiaries) or business opportunities that such parties participate in or desire to participate in, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no such person shall be liable to us for breach of any fiduciary or other duty, as a director or officer or controlling stockholder or otherwise, by reason of the fact that such person pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us unless, in the case of any such person who is our director or officer, any such business opportunity is expressly offered to such director or officer solely in his or her capacity as our director or officer. We will also enter into a business opportunity agreement with EnCap that contains similar contractual provisions. As a result, EnCap or its affiliates may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to EnCap and its affiliates could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours. See Description of Capital Stock. We expect to be a controlled company within the meaning of the NYSE rules and, if applicable, would qualify for and will rely on exemptions from certain corporate governance requirements. Because OAS Holdco will own a majority of our outstanding common stock following the completion of this offering, we expect to be a controlled company as that term is set forth in Section 303A of the NYSE Listed Company Manual. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain NYSE corporate governance requirements, including: the requirement that a majority of our board of directors consist of independent directors; the requirement that our Nominating and Governance Committee be composed entirely of independent directors with a written charter addressing the Committee s purpose and responsibilities; and Table of Contents the requirement that our Compensation Committee be composed entirely of independent directors with a written charter addressing the Committee s purpose and responsibilities. These requirements will not apply to us as long as we remain a controlled company. Following this offering, we may utilize some or all of these exemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. EnCap s significant ownership interest could adversely affect investors perceptions of our corporate governance. Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation. On February 1, 2010, the White House released President Obama s budget proposal for the fiscal year 2011, or the Budget Proposal. Among the changes recommended in the Budget Proposal is the elimination of certain key U.S. federal income tax preferences currently available to coal, oil and gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for United States production activities, and (iv) the increase in the amortization period from two years to seven years for geophysical costs paid or incurred in connection with the exploration for, or development of, oil or gas within the United States. It is unclear whether any such changes will actually be enacted or, if enacted, how soon any such changes could become effective. The passage of any legislation as a result of the Budget Proposal or any other similar change in U.S. federal income tax law could affect certain tax deductions that are currently available with respect to oil and gas exploration and production and could negatively impact the value of an investment in our shares. Table of Contents

parsed_sections/risk_factors/2010/CHTR_charter_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers acceptance financings, and net payments (if any) pursuant to Hedging Obligations); and (2) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period; and (3) any interest expense on Indebtedness of another Person that is guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon); in each case, on a consolidated basis and in accordance with GAAP, excluding, however, any amount of such interest of any Restricted Subsidiary of the referent Person if the net income of such Restricted Subsidiary is excluded in the calculation of Consolidated EBITDA pursuant to clause (z) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of the definition thereof). Continuing Directors means, as of any date of determination, any member of the Board of Directors of CCI who: (1) was a member of the Board of Directors of CCI on the Issue Date; or (2) was nominated for election or elected to the Board of Directors of CCI with the approval of a majority of the Continuing Directors who were members of such Board of Directors of CCI at the time of such nomination or election or whose election or appointment was previously so approved. Credit Facilities means, with respect to CCH II and/or its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities, in each case with banks or other lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Default means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. Disposition means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease or conveyance, or other disposition of all or substantially all of such Person s assets or Capital Stock. Disqualified Stock means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof) or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require CCH II to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that CCH II may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption Certain Covenants Restricted Payments. Equity Interests means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). Equity Offering means any private or public offering of Qualified Capital Stock of CCH II (other than to a Parent or one of its Subsidiaries) or a Parent of which the gross cash proceeds to CCH II or received by CCH II as a capital contribution from such Parent (directly or indirectly), as the case may be, are at least $25 million, other than public offerings with respect to CCH II s membership interests or a Parent s membership interests or common stock, as applicable, registered on Form S-8, provided that the offering of Qualified Capital Stock issued pursuant to the Plan of Reorganization shall not constitute an Equity Offering . Existing Indebtedness means Indebtedness of CCH II and its Restricted Subsidiaries in existence on the Issue Date, until such amounts are repaid. GAAP means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. Guarantee or guarantee means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness, measured as the lesser of the aggregate outstanding amount of the Indebtedness so guaranteed and the face amount of the guarantee. Hedging Obligations means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; (2) interest rate option agreements, foreign currency exchange agreements, foreign currency swap agreements; and (3) other agreements or arrangements designed to protect such Person against fluctuations in interest and currency exchange rates. Indebtedness means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) in respect of banker s acceptances; (4) representing Capital Lease Obligations; (5) in respect of the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) represented by Hedging Obligations only to the extent an amount is then owed and is payable pursuant to the terms of such Hedging Obligations, if and to the extent any of the preceding items would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term Indebtedness includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be: (1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. Investment Grade Rating means a rating equal to or higher than Baa3 (or the equivalent) by Moody s and BBB- (or the equivalent) by S&P. Investments means, with respect to any Person, all investments by such Person in other Persons, including Affiliates, in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business) and purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. Issue Date means November 30, 2009. Leverage Ratio means, as to CCH II, as of any date, the ratio of: (1) the Consolidated Indebtedness of CCH II on such date to (2) the aggregate amount of Consolidated EBITDA for CCH II for the most recently ended fiscal quarter for which internal financial statements are available (the Reference Period ) multiplied by four. In addition to the foregoing, for purposes of this definition, Consolidated EBITDA shall be calculated on a pro forma basis after giving effect to (1) the issuance of the Notes; (2) the incurrence of the Indebtedness or the issuance of the Disqualified Stock by CCH II or a Restricted Subsidiary or Preferred Stock of a Restricted Subsidiary (and the application of the proceeds therefrom) giving rise to the need to make such calculation and any incurrence or issuance (and the application of the proceeds therefrom) or repayment of other Indebtedness, Disqualified Stock or Preferred Stock of a Restricted Subsidiary, other than the incurrence or repayment of Indebtedness for ordinary working capital purposes, at any time subsequent to the beginning of the Reference Period and on or prior to the date of determination, as if such incurrence (and the application of the proceeds thereof), or the repayment, as the case may be, occurred on the first day of the Reference Period; and (3) any Dispositions or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any person that becomes a Restricted Subsidiary as a result of such Asset Acquisition) incurring, assuming or otherwise becoming liable for or issuing Indebtedness, Disqualified Stock or Preferred Stock) made on or subsequent to the first day of the Reference Period and on or prior to the date of determination, as if such Disposition or Asset Acquisition (including the incurrence, assumption or liability for any such Indebtedness, Disqualified Stock or Preferred Stock and also including any Consolidated EBITDA associated with such Asset Acquisition, including any cost savings adjustments in compliance with Regulation S-X promulgated by the SEC) had occurred on the first day of the Reference Period. In calculating the Leverage Ratio, the Consolidated Indebtedness of CCH II on such date shall not include Indebtedness incurred pursuant to paragraph (1) under the caption Incurrence of Indebtedness and Issuance of Preferred Stock that is or was incurred in connection with the transaction for which the calculation is being made. Lien means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. Management Fees means the fees (including expense reimbursements) payable to any Parent pursuant to the management and mutual services agreements between any Parent of CCH II and CCO or between any Parent of CCH II and other Restricted Subsidiaries of CCH II or pursuant to the limited liability company agreements of certain Restricted Subsidiaries as such management, mutual services or limited liability company agreements exist on the Issue Date (or, if later, on the date any new Restricted Subsidiary is acquired or created), including any amendment or replacement thereof, provided, that any such new agreements or amendments or replacements of existing agreements, taken as a whole, are not more disadvantageous to the holders of the Notes in any material respect than such agreements existing on the Issue Date and further provided, that such new, amended or replacement management agreements do not provide for percentage fees, taken together with fees under existing agreements, any higher than 3.5% of CCI s consolidated total revenues for the applicable payment period. Moody s means Moody s Investors Service, Inc. or any successor to the rating agency business thereof. Net Proceeds means the aggregate cash proceeds received by CCH II or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof or taxes paid or payable as a result thereof (including amounts distributable in respect of owners , partners or members tax liabilities resulting from such sale), in each case after taking into account any available tax credits or deductions and any tax sharing arrangements and amounts required to be applied to the repayment of Indebtedness. Non-Recourse Debt means Indebtedness: (1) as to which neither CCH II nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness); (b) is directly or indirectly liable as a guarantor or otherwise; or (c) constitutes the lender; (2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness (other than the Notes) of CCH II or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing that they will not have any recourse to the Capital Stock or assets of CCH II or any of its Restricted Subsidiaries. Note Guarantee means the unconditional Guarantee by any Parent of the Issuers payment Obligations under the Notes. Obligations means any principal, interest, penalties, fees, indemnifications, reimbursements, damages, Guarantees and other liabilities payable under the documentation governing any Indebtedness, in each case, whether now or hereafter existing, renewed or restructured, whether or not from time to time decreased or extinguished and later increased, created or incurred, whether or not arising on or after the commencement of a case under Title 11, U.S. Code or any similar federal or state law for the relief of debtors (including post-petition interest) and whether or not allowed or allowable as a claim in any such case. Parent means CCH I, CIH, Charter Holdings, CCHC, Charter Communications Holding Company, LLC, CCI and/or any direct or indirect Subsidiary of the foregoing 100% of the Capital Stock of which is owned directly or indirectly by one or more of the foregoing Persons, as applicable, and that directly or indirectly beneficially owns 100% of the Capital Stock of CCH II, and any successor Person to any of the foregoing. Parent Guarantor means any Parent that executes a Note Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. Permitted Investments means: (1) any Investment by CCH II in a Restricted Subsidiary thereof, or any Investment by a Restricted Subsidiary of CCH II in CCH II or in another Restricted Subsidiary of CCH II; (2) any Investment in Cash Equivalents; (3) any Investment by CCH II or any of its Restricted Subsidiaries in a Person, if as a result of such Investment: (a) such Person becomes a Restricted Subsidiary of CCH II; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, CCH II or a Restricted Subsidiary of CCH II; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption Repurchase at the Option of Holders Asset Sales ; (5) any Investment made out of the net cash proceeds of the issue and sale (other than to a Subsidiary of CCH II) of Equity Interests (other than Disqualified Stock) or cash contributions to the common equity of CCH II, in each case after the Issue Date, to the extent that such net cash proceeds have not been applied to make a Restricted Payment or to effect other transactions pursuant to the covenant described under Certain Covenants Restricted Payments (with the amount of usage of the basket in this clause (5) being determined net of the aggregate amount of principal, interest, dividends, distributions, repayments, proceeds or other value otherwise returned or recovered in respect of any such Investment, but not to exceed the initial amount of such Investment); (6) other Investments (which Investments shall not be used for the payment of dividends or distributions with respect to Equity Interests of CCH II or for the repayment, prepayment, purchase, defeasance or other retirement of indebtedness that is subordinated in right of payment to the Notes) in any Person (other than any Parent) having an aggregate fair market value when taken together with all other Investments in any Person made by CCH II and its Restricted Subsidiaries (without duplication) pursuant to this clause (6) from and after the Issue Date, not to exceed $650 million (initially measured on the date each such Investment was made and without giving effect to subsequent changes in value, but reducing the amount outstanding by the aggregate amount of principal, interest, dividends, distributions, repayments, proceeds or other value otherwise returned or recovered in respect of any such Investment, but not to exceed the initial amount of such Investment) at any one time outstanding; (7) Investments in customers and suppliers in the ordinary course of business which either (A) generate accounts receivable, or (B) are accepted in settlement of bona fide disputes. (8) Investments consisting of payments by CCH II or any of its subsidiaries of amounts that are neither dividends nor distributions but are payments of the kind described in clause (4) of the second paragraph of the covenant described above under the caption Certain Covenants Restricted Payments to the extent such payments constitute Investments; (9) regardless of whether a Default then exists, Investments in any Unrestricted Subsidiary made by CCH II and/or any of its Restricted Subsidiaries with the proceeds of distributions from any Unrestricted Subsidiary; and (10) any Investment by CCH II or any of its Restricted Subsidiaries so long as the proceeds of such Investment are used to pay Specified Fees and Expenses. Permitted Liens means: (1) Liens on the assets of the CCOH Group securing CCOH Group Indebtedness and related Obligations; (2) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with CCH II; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with CCH II and related assets, such as the proceeds thereof; (3) Liens on property existing at the time of acquisition thereof by CCH II; provided that such Liens were in existence prior to the contemplation of such acquisition; (4) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (5) purchase money mortgages or other purchase money Liens (including, without limitation, any Capitalized Lease Obligations) incurred by CCH II upon any fixed or capital assets acquired after the Issue Date or purchase money mortgages (including, without limitation, Capital Lease Obligations) on any such assets, whether or not assumed, existing at the time of acquisition of such assets, whether or not assumed, so long as (a) such mortgage or lien does not extend to or cover any of the assets of CCH II, except the asset so developed, constructed, or acquired, and directly related assets such as enhancements and modifications thereto, substitutions, replacements, proceeds (including insurance proceeds), products, rents and profits thereof, and (b) such mortgage or lien secures the obligation to pay all or a portion of the purchase price of such asset, interest thereon and other charges, costs and expenses (including, without limitation, the cost of design, development, construction, acquisition, transportation, installation, improvement, and migration) and is incurred in connection therewith (or the obligation under such Capitalized Lease Obligation) only; (6) Liens existing on the Issue Date and replacement Liens therefor that do not encumber additional property; (7) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (8) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (9) Liens incurred or deposits made in the ordinary course of business in connection with workers compensation, unemployment insurance and other types of social security; (10) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligation, bankers acceptance, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (11) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of CCH II or any of its Restricted Subsidiaries; (12) Liens of franchisors or other regulatory bodies arising in the ordinary course of business; (13) Liens arising from filing Uniform Commercial Code financing statements regarding leases or other Uniform Commercial Code financing statements for precautionary purposes relating to arrangements not constituting Indebtedness; (14) Liens arising from the rendering of a final judgment or order against CCH II or any of its Restricted Subsidiaries that does not give rise to an Event of Default; (15) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (16) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Hedging Obligations and forward contracts, options, future contracts, future options or similar agreements or arrangements designed solely to protect CCH II or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (17) Liens consisting of any interest or title of licensor in the property subject to a license; (18) Liens on the Capital Stock of Unrestricted Subsidiaries; (19) Liens arising from sales or other transfers of accounts receivable which are past due or otherwise doubtful of collection in the ordinary course of business; (20) Liens incurred with respect to obligations which in the aggregate do not exceed $50 million at any one time outstanding; (21) Liens in favor of the trustee arising under the Indenture and similar provisions in favor of trustees or other agents or representatives under indentures or other agreements governing debt instruments entered into after the date hereof; (22) Liens in favor of the trustee for its benefit and the benefit of holders of the Notes, as their respective interests appear; and (23) Liens securing Permitted Refinancing Indebtedness, to the extent that the Indebtedness being refinanced was secured or was permitted to be secured by such Liens. Permitted Refinancing Indebtedness means any Indebtedness of CCH II or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used within 60 days after the date of issuance thereof to extend, refinance, renew, replace, defease or refund, other Indebtedness of CCH II or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that unless permitted otherwise by the Indenture, no Indebtedness of any Restricted Subsidiary may be issued in exchange for, nor may the net proceeds of Indebtedness be used to extend, refinance, renew, replace, defease or refund, Indebtedness of CCH II; provided further that: (1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable) plus accrued interest and premium, if any, on the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith), except to the extent that any such excess principal amount (or accreted value, as applicable) would be then permitted to be incurred by other provisions of the covenant described above under the caption Certain Covenants Incurrence of Indebtedness and Issuance of Preferred Stock. (2) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. Person means any individual, corporation, partnership, joint venture, association, limited liability company, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. Plan of Reorganization means the Plan of Reorganization of Charter Communications, Inc., et al. dated March 27, 2009 and confirmed by the United States Bankruptcy Court for the Southern District of New York on November 17, 2009. Preferred Stock, as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which, by its terms, is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. Productive Assets means assets (including assets of a Person owned directly or indirectly through ownership of Capital Stock) of a kind used or useful in the Cable Related Business. Qualified Capital Stock means any Capital Stock that is not Disqualified Stock. Rating Agencies means Moody s and S&P. Refinancing Specified Parent Indebtedness means, with respect to Specified Parent Indebtedness, new Indebtedness incurred by a Parent to refinance (a) such Specified Parent Indebtedness or (b) Refinancing Specified Parent Indebtedness in respect of such Specified Parent Indebtedness; provided that while such new Indebtedness is outstanding, the Specified Parent Indebtedness being refinanced (if it had remained outstanding) would continue to qualify as Specified Parent Indebtedness. Restricted Investment means an Investment other than a Permitted Investment. Restricted Subsidiary of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. S&P means Standard & Poor s Ratings Service, a division of the McGraw-Hill Companies, Inc. or any successor to the rating agency business thereof. SEC means the Securities and Exchange Commission. Series A Preferred Stock means the 15% Series A Preferred Stock of CCI issued pursuant to the Plan of Reorganization, including any Series A Preferred Stock issued, or deemed issued pursuant to the terms thereof as they exist on the Issue Date. Significant Subsidiary means (a) with respect to any Person, any Restricted Subsidiary of such Person which would be considered a Significant Subsidiary as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and (b) in addition, with respect to CCH II, Capital Corp. Special Interest means special or additional interest in respect of the Notes that is payable by the Issuers as liquidated damages upon specified registration defaults pursuant to the Registration Rights Agreement. Specified Fees and Expenses has the meaning assigned to such term in the Plan of Reorganization. Specified Parent Indebtedness means Indebtedness incurred by a Parent whose proceeds are contributed to CCH II (whether as an equity investment or in the form of an exchange for Indebtedness of CCH II) and used to benefit the business of CCH II and its Restricted Subsidiaries and not used directly or indirectly to pay a dividend from CCH II; provided that CCH II shall, within 5 business days of such incurrence, deliver to the trustee an officers certificate specifying such Indebtedness as Specified Parent Indebtedness and disclosing the use of proceeds therefrom. Stated Maturity means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the documentation governing such Indebtedness on the Issue Date, or, if none, the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. Subsidiary means, with respect to any Person: (1) any corporation, association or other business entity of which at least 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and, in the case of any such entity of which 50% of the total voting power of shares of Capital Stock is so owned or controlled by such Person or one or more of the other Subsidiaries of such Person, such Person and its Subsidiaries also have the right to control the management of such entity pursuant to contract or otherwise; and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person, or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). Treasury Rate means, as of the applicable redemption date, the yield to maturity as of such redemption (or deposit) date of the United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to such redemption (or deposit) date (or, if such Statistical Release is no longer published, any publicly available source of similar market date)) most nearly equal to the period from such redemption (or deposit) date to November 30, 2012; provided, however, that if the period from such redemption (or deposit) date to November 30, 2012, is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be used. Unrestricted Subsidiary means any Subsidiary of CCH II that is designated by the Board of Directors of CCH II as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with CCH II or any Restricted Subsidiary of CCH II unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to CCH II or such Restricted Subsidiary of CCH II than those that might be obtained at the time from Persons who are not Affiliates of CCH II unless such terms constitute Investments permitted by the covenant described above under the caption Certain Covenants Investments, Permitted Investments, Asset Sales permitted under the covenant described above under the caption Repurchase at the Option of the Holders Asset Sales or sale-leaseback transactions permitted by the covenant described above under the caption Certain Covenants Sale and Leaseback Transactions ; (3) is a Person with respect to which neither CCH II nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person s financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of CCH II or any of its Restricted Subsidiaries; and (5) does not own any Capital Stock of any Restricted Subsidiary of CCH II. Any designation of a Subsidiary of CCH II as an Unrestricted Subsidiary shall be evidenced to the trustee by filing with the trustee a certified copy of the board resolution giving effect to such designation and an officers certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption Certain Covenants Investments. If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of CCH II as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption Certain Covenants Incurrence of Indebtedness and Issuance of Preferred Stock, CCH II shall be in default of such covenant. The Board of Directors of CCH II may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if: (1) such Indebtedness is permitted under the covenant described under the caption Certain Covenants Incurrence of Indebtedness and Issuance of Preferred Stock, calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence immediately following such designation. Voting Stock of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the board of directors or comparable governing body of such Person. Weighted Average Life to Maturity means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness. Wholly Owned Restricted Subsidiary of any Person means a Restricted Subsidiary of such Person all of the outstanding common equity interests or other ownership interests of which (other than directors qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. BOOK-ENTRY SETTLEMENT AND CLEARANCE The Global Notes The Notes are represented by global notes in definitive, fully registered form, without interest coupons (collectively, the Global Notes ). The Global Notes have been deposited with the Trustee as custodian for DTC and registered in the name of Cede & Co., as nominee of DTC. Ownership of beneficial interests in each Global Note is limited to persons who have accounts with DTC ( DTC participants ) or persons who hold interests through DTC participants. We expect that under procedures established by DTC: upon deposit of each Global Note with DTC s custodian, DTC will credit portions of the principal amount of the Global Note to the accounts of the DTC participants; and ownership of beneficial interests in each Global Note will be shown on, and transfer of ownership of those interests will be effected only through, records maintained by DTC (with respect to interests of DTC participants) and the records of DTC participants (with respect to other owners of beneficial interests in the Global Note). Beneficial interests in the Global Notes may not be exchanged for notes in physical, certificated form except in the limited circumstances described below. Book-entry procedures for the Global Notes All interests in the Global Notes will be subject to the operations and procedures of DTC, Euroclear and Clearstream. We provide the following summaries of those operations and procedures solely for the convenience of investors. The operations and procedures of each settlement system are controlled by that settlement system and may be changed at any time. Neither we nor the initial purchasers are responsible for those operations or procedures. DTC has advised us that it is: a limited purpose trust company organized under the laws of the State of New York; a banking organization within the meaning of the New York State Banking Law; a member of the Federal Reserve System; a clearing corporation within the meaning of the Uniform Commercial Code; and a clearing agency registered under Section 17A of the Exchange Act. DTC was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between its participants through electronic book-entry changes to the accounts of its participants. DTC s participants include securities brokers and dealers; banks and trust companies; clearing corporations and other organizations. Indirect access to DTC s system is also available to others such as banks, brokers, dealers and trust companies; these indirect participants clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly. Investors who are not DTC participants may beneficially own securities held by or on behalf of DTC only through DTC participants or indirect participants in DTC. So long as DTC s nominee is the registered owner of a Global Note, that nominee will be considered the sole owner or holder of the notes represented by that Global Note for all purposes under the applicable indenture. Except as provided below, owners of beneficial interests in a Global Note: will not be entitled to have notes represented by the Global Note registered in their names; will not receive or be entitled to receive physical, certificated notes; and will not be considered the owners or holders of the notes under the applicable indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the Trustee under the applicable indenture. As a result, each investor who owns a beneficial interest in a Global Note must rely on the procedures of DTC to exercise any rights of a holder of notes under the applicable indenture (and, if the investor is not a participant or an indirect participant in DTC, on the procedures of the DTC participant through which the investor owns its interest). Payments of principal, premium (if any) and interest with respect to the notes represented by a Global Note will be made by the Trustee to DTC s nominee as the registered holder of the Global Note. Neither we nor the Trustee will have any responsibility or liability for the payment of amounts to owners of beneficial interests in a Global Note, for any aspect of the records relating to or payments made on account of those interests by DTC, or for maintaining, supervising or reviewing any records of DTC relating to those interests. Payments by participants and indirect participants in DTC to the owners of beneficial interests in a Global Note will be governed by standing instructions and customary industry practice and will be the responsibility of those participants or indirect participants and DTC. Transfers between participants in DTC will be effected under DTC s procedures and will be settled in same-day funds. Transfers between participants in Euroclear or Clearstream will be effected in the ordinary way under the rules and operating procedures of those systems. Cross-market transfers between DTC participants, on the one hand, and Euroclear or Clearstream participants, on the other hand, will be effected within DTC through the DTC participants that are acting as depositaries for Euroclear and Clearstream. To deliver or receive an interest in a Global Note held in a Euroclear or Clearstream account, an investor must send transfer instructions to Euroclear or Clearstream, as the case may be, under the rules and procedures of that system and within the established deadlines of that system. If the transaction meets its settlement requirements, Euroclear or Clearstream, as the case may be, will send instructions to its DTC depositary to take action to effect final settlement by delivering or receiving interests in the relevant Global Notes in DTC, and making or receiving payment under normal procedures for same-day funds settlement applicable to DTC. Euroclear and Clearstream participants may not deliver instructions directly to the DTC depositaries that are acting for Euroclear or Clearstream. Because of time zone differences, the securities account of a Euroclear or Clearstream participant that purchases an interest in a Global Note from a DTC participant will be credited on the business day for Euroclear or Clearstream immediately following the DTC settlement date. Cash received in Euroclear or Clearstream from the sale of an interest in a Global Note to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream cash account as of the business day for Euroclear or Clearstream following the DTC settlement date. DTC, Euroclear and Clearstream have agreed to the above procedures to facilitate transfers of interests in the Global Notes among participants in those settlement systems. However, the settlement systems are not obligated to perform these procedures and may discontinue or change these procedures at any time. Neither we nor the Trustee will have any responsibility for the performance by DTC, Euroclear or Clearstream or their participants or indirect participants of their obligations under the rules and procedures governing their operations. Certificated notes

parsed_sections/risk_factors/2010/CIK0000002601_aeroflex_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS In addition to the other information set forth in this prospectus, you should carefully consider the following factors before deciding to invest in the Notes. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your original investment. Risks Related to the Notes and Our Indebtedness Instability in financial markets could adversely affect our ability to access additional capital. In recent years, the volatility and disruption in the capital and credit markets have reached unprecedented levels. If these conditions continue or worsen, there can be no assurance that we will not experience a material adverse effect on our ability to borrow money, including under our senior secured credit facility, or have access to capital, if needed. Although our lenders have made commitments to make funds available to us in a timely fashion, our lenders may be unable or unwilling to lend money. In addition, if we determine that it is appropriate or necessary to raise capital in the future, the future cost of raising funds through the debt or equity markets may be more expensive or those markets may be unavailable. If we were unable to raise funds through debt or equity markets, it could have a material adverse effect on our business, results of operations and financial condition. Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations. We have a significant amount of indebtedness. As of September 30, 2010, we had $882.8 million of debt outstanding, including approximately $489.1 million of secured debt under our senior secured credit facility, $225.0 million of aggregate principal amount of Notes under the indenture governing our senior notes and $168.0 million of subordinated unsecured debt under our senior subordinated unsecured credit facility. Additionally, as of September 30, 2010, we had the ability to borrow an additional $50.0 million under the revolving portion of our senior secured credit facility. Our substantial indebtedness could have important consequences. For example, it could: make it more difficult for us to satisfy our obligations; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our worldwide cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; limit our ability to borrow additional funds; and adversely impact our ability to comply with the covenants and restrictions in our debt agreements, and, in turn, could result in a default under our debt agreements. Increases in interest rates could increase interest costs under our senior secured credit facility. Our senior secured credit facility bears interest at variable rates. As of September 30, 2010, we had $489.1 million outstanding under the term loan portion of our senior secured credit facility, the un-hedged portion which is subject to variable interest rates. Each change of 1% in interest rates would result in a $3.7 million change in our annual interest expense on the un-hedged portion of the term loan borrowings and a $507,000 change in our annual interest expense on the revolving loan borrowings, assuming the entire $50.0 million under the revolving portion of our senior secured credit facility was outstanding. Any debt we incur in the future may also bear interest at variable rates. Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our debt allow us to incur substantial amounts of additional debt, subject to certain limitations. For example, we have up to $50.0 million of availability under the revolving portion of our senior secured credit facility and we have the ability to increase the aggregate amount of our senior secured credit facility by up to an aggregate amount equal to the greater of (i) $75.0 million and (ii) such greater amount if as of the last day of the most recently ended fiscal quarter, the senior secured leverage ratio would be 3.75:1 or less after giving effect to such greater amount as if such greater amount were drawn in its entirety as of such date, in each case without the consent of any person other than the institutions agreeing to provide all or any portion of such increase. If new indebtedness is added to our and our subsidiaries' current debt levels, the related risks that we and they now face would intensify. To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Our ability to make payments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, to the extent we have consolidated excess cash flow, as defined in the credit agreement governing our senior secured credit facility, we must use specified portions of the excess cash flow to prepay the senior secured credit facility. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, if for any reason we are unable to meet our debt service obligations, we would be in default under the terms of our agreements governing our outstanding debt. If such a default were to occur, the lenders under our senior secured credit facility could elect to declare all amounts outstanding under our senior secured credit facility immediately due and payable, and the lenders would not be obligated to continue to advance funds to us. In addition, if such a default were to occur, any amounts then outstanding under the senior subordinated unsecured credit facility or Notes could become immediately due and payable. If the amounts outstanding under these debt agreements are accelerated, our assets may not be sufficient to repay in full the amounts owed to our debt holders, including holders of the Notes. The right to receive payments on the Notes is effectively subordinated to the rights of our and the guarantors existing and future secured creditors. Holders of our secured indebtedness and the secured indebtedness of the guarantors of our indebtedness will have claims that are prior to the claims of the holders of the Notes to the extent of the value of the assets securing that other indebtedness. Notably, we and our subsidiaries, including the guarantors, are parties to our senior secured credit facility, which is secured by liens on substantially all of our assets and the assets of the guarantors and a pledge of all of our capital stock and all of the capital stock of our domestic subsidiaries. The Notes are effectively subordinated to all of our secured indebtedness. In the event of any distribution or payment of our assets or any pledged capital stock in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured indebtedness will have prior claims to those of our assets and any pledged capital stock that constitute their collateral. Holders of the Notes will participate ratably with all other holders of our unsecured indebtedness that is deemed to be of the same class as the Notes and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, there may not be sufficient assets to pay amounts due on the Notes. As a result, holders of the Notes may receive less, ratably, than holders of secured indebtedness. If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes. Any default under the agreements governing our indebtedness, including a default under our senior secured credit facility or our senior subordinated unsecured credit facility that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our senior secured credit facility and our senior subordinated unsecured credit facility), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under our senior secured credit facility, our senior subordinated unsecured credit facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under our senior secured credit facility or our senior subordinated unsecured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facility and/or our senior subordinated unsecured credit facility, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, such as the lenders under our senior secured credit facility, could proceed against the collateral securing the debt. Because the Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility have customary cross-default provisions, if the indebtedness under the Notes, our senior secured credit facility, our senior subordinated unsecured credit facility, or any of our other debt is accelerated, we may be unable to repay or finance the amounts due. Our senior secured credit facility, our senior subordinated unsecured credit facility and the Indenture governing the Notes impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some actions. Our senior secured credit facility, our senior subordinated unsecured credit facility and the Indenture governing the Notes contain restrictions on our activities, including but not limited to covenants that restrict us and our restricted subsidiaries, as defined in our senior subordinated unsecured credit facility, from: incurring additional indebtedness and issuing disqualified stock or preferred stock; making certain investments or other restricted payments; paying dividends and making other distributions with respect to capital stock, or repurchasing, redeeming or retiring capital stock or subordinated debt; selling or otherwise disposing of our assets; under certain circumstances, issuing or selling equity interests; creating liens on our assets; consolidating or merging with, or acquiring in excess of specified annual limitations, another business, or selling or disposing of all or substantially all of our assets; and entering into certain transactions with our affiliates. In addition, under our senior secured credit facility, we are required to comply with a maximum total leverage ratio test. If we fail to maintain compliance with the maximum total leverage ratio test under our senior secured credit facility and do not remedy any non-compliance through the issuance of additional equity interests pursuant to the limited cure right set forth therein, we will be in default. The senior secured credit facility also requires us to use specified portions of our consolidated excess cash flow, as defined in the agreement governing our senior secured credit facility, to prepay the senior secured credit facility. The restrictions in our senior secured credit facility, the senior subordinated unsecured credit facility and the Indenture governing the Notes may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We may not be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements, and we may not be able to refinance our debt on terms acceptable to us, or at all. The breach of any of these covenants and restrictions could result in a default under our senior secured credit facility, our senior subordinated unsecured credit facility and the Indenture governing the Notes. An event of default under our debt agreements could permit our lenders to declare all amounts borrowed from them to be due and payable. We may not have the ability to raise the funds necessary to finance any change of control offer required by the Indenture governing the Notes. Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the Notes or that restrictions in our senior secured credit facility will not allow such repurchases. Our failure to purchase the tendered Notes would constitute an event of default under the Indenture governing the Notes which, in turn, would constitute a default under our senior secured credit facility and, if the lenders accelerate the debt under our senior secured credit facility, a default under our senior subordinated unsecured credit facility. In addition, the occurrence of a change of control would also constitute an event of default under our senior secured credit facility. A default under our senior secured credit facility would result in a default under the Indenture governing the Notes and under our senior subordinated unsecured credit facility, if the lenders accelerate the debt under our senior secured credit facility. Moreover, our senior secured credit facility restricts, and any future indebtedness we incur may restrict, our ability to repurchase the Notes, including following a change of control event. As a result, following a change of control event, we would not be able to repurchase the Notes unless we first repay all indebtedness outstanding under our senior secured credit facility and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us. Federal and state statutes allow courts, under certain specific circumstances, to void guarantees and/or require note holders to return payments received from guarantors. Under current federal bankruptcy law and comparable provisions of state fraudulent transfer or fraudulent conveyance laws, a guarantee may be voided or cancelled, or claims in respect of a guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee: issued the guarantee with the intent to delay, hinder or defraud present or future creditors; or received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and either was insolvent or rendered insolvent by reason of such incurrence; or was engaged, or about to engage, in a business or transaction for which the guarantor s remaining assets constituted unreasonably small capital; or intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature (as all of the foregoing terms are defined in or interpreted under the fraudulent transfer or conveyance statutes); or was a defendant in an action for money damages, or had a judgment for money damages docketed against it (if, in either case, after final judgment the judgment is unsatisfied). In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor. A court likely would find that a guarantor did not receive reasonably equivalent value or fair consideration in exchange for its guarantee if the value received by the guarantor were found to be disproportionately small when compared with its obligations under the guarantee or, put differently, it did not benefit, directly or indirectly, from the issuance of the Notes. The measures of insolvency for purposes of fraudulent transfer or conveyance laws will vary depending upon the particular law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred. Generally, however, a guarantor would be considered insolvent if: the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of the Notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. The Notes are structurally subordinated to all obligations of our non-guarantor subsidiaries. The Notes are not guaranteed by any of our current or future foreign subsidiaries. As a result of this structure, the Notes are structurally subordinated to all indebtedness and other obligations, including trade payables, of our non-guarantor subsidiaries. The effect of this subordination is that, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding involving a non-guarantor subsidiary, the assets of that subsidiary cannot be used to pay the holders of the Notes until all other claims against that subsidiary, including trade payables, have been fully paid. As of June 30, 2010, the aggregate total assets (based on book value) of our non-guarantor subsidiaries were $239.0 million, representing approximately 17.6% of our total assets. In addition, 21.0% of our total liabilities were attributable to our non-guarantor subsidiaries as of June 30, 2010. For fiscal 2010, 28.9% of our net sales was attributable to our non-guarantor subsidiaries. For fiscal 2010, our non-guarantor subsidiaries had net income of $35.0 million. Our controlling equity holders may take actions that conflict with the interests of the holders of our debt. Substantially all of the voting power of our equity is held by the Sponsors. Accordingly, they control the power to elect our directors and officers, to appoint new management and to approve all actions requiring the approval of the holders of our equity, including adopting amendments to our constituent documents and approving mergers, acquisitions or sales of all or substantially all of our assets. The directors have the authority, subject to the terms of our debt, to issue additional indebtedness or equity, implement equity repurchase programs, declare dividends and make other such decisions about our equity. In addition, the interests of our controlling equity holders could conflict with the interests of the holders of our debt. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our controlling equity holders might conflict with the interests of our debt holders. Our controlling equity holders also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to the holders of our debt. There is no public market for the Notes, and we do not know if a market will ever develop or, if a market does develop, whether it will be sustained. We do not intend to apply for listing or quotation of the Notes on any securities or stock market, although our Notes are eligible to trade on the PORTAL Market Trading System. The liquidity of any market for the Notes will depend on a number of factors, including: the number of holders of Notes; our operating performance and financial condition; the market for similar securities; the interest of securities dealers in making a market in the Notes; and prevailing interest rates. The Notes were issued to, and we believe the Notes are owned by, a relatively small number of beneficial owners. Goldman, Sachs & Co., or the Initial Purchaser, was the initial purchaser of the Notes pursuant to a purchase agreement among us, the guarantors and Goldman, Sachs & Co., dated August 7, 2008. The Initial Purchaser presently makes a market in the Notes as permitted by applicable law. However, the Initial Purchaser is under no obligation to do so and may cease their market-making at any time without notice. Accordingly, the market for the Notes may cease to exist. Because we are an affiliate of the Initial Purchaser, the Initial Purchaser is required to deliver a current market-maker prospectus, such as this prospectus, and otherwise comply with the registration requirements of the Securities Act in connection with any secondary market sale of the Notes, which may affect their ability to continue market-making activities. By way of this prospectus, we are making a market-maker prospectus generally available to the Initial Purchaser to permit it to engage in market-making transactions. However, the exchange and registration rights agreement, dated August 7, 2008, among us, the guarantors and Goldman, Sachs & Co. provides that we may, for valid business reasons, allow the market-maker prospectus to cease to be effective and usable for a period of time as set forth in the exchange and registration rights agreement or as otherwise acceptable to the market-maker. As a result, the liquidity of the secondary market for the Notes may be materially adversely affected by the unavailability of a current market-maker prospectus. Risks Relating to Our Business A worsening of the global recession and continued credit tightening could continue to adversely affect us. The current global recession and continued credit tightening, including failures of financial institutions, have initiated unprecedented government intervention in the U.S., Europe and other regions of the world. If macro-economic concerns continue or worsen, our customers could experience heightened financial difficulties, and as a result, could modify, delay or cancel plans to purchase our products or services, which could cause our sales to decline, or become unable to make payment to us for amounts due and owing. In addition, our suppliers could experience credit or other financial difficulties that could result in delays in their ability to supply us with necessary raw materials, components or finished products. These conditions may make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities and could result in an asset impairment. The occurrence of any of these factors could have a material adverse effect on our business, results of operations and financial condition. For example, our sales declined by approximately $44 million, or approximately 7%, between fiscal 2008 and fiscal 2009. This decline caused us to write-off approximately $41.2 million of goodwill and other intangible assets related to our RF and microwave reporting unit, in the fourth quarter of fiscal 2009, due to the decrease in sales and prospects of that unit in the then current economic environment. Our operating results may fluctuate significantly on a quarterly basis. Our sales and other operating results have fluctuated significantly in the past, and we expect this trend will continue. Factors which affect our results include: the timing, cancellation or rescheduling of customer orders and shipments; the pricing and mix of products sold; our ability to obtain components and subassemblies from contract manufacturers and suppliers; variations in manufacturing efficiencies; and research and development and new product introductions. Many of these factors are beyond our control. Our performance in any one fiscal quarter is not necessarily indicative of any financial trends or future performance. The cyclicality of our end user markets could harm our financial results. Many of the end markets we serve, including but not limited to the commercial wireless market, have historically been cyclical and have experienced periodic downturns. The factors leading to and the severity and length of a downturn are very difficult to predict and there can be no assurance that we will appropriately anticipate changes in the underlying end markets we serve or that any increased levels of business activity will continue as a trend into the future. If we fail to anticipate changes in the end markets we serve, our business, results of operations and financial condition could be materially adversely affected. Our future operating results are dependent on the growth in our customers' businesses and on our ability to identify and enter new markets. Our growth is dependent on the growth in the sales of our customers' products as well as the development by our customers of new products. If we fail to anticipate changes in our customers' businesses and their changing product needs or successfully identify and enter new markets, our results of operations and financial position could be negatively impacted. We cannot assure you that the markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets or that we can maintain adequate gross margins or profits in these markets. A decline in demand in one or several of our end-user markets could have a material adverse impact on the demand for our products and have a material adverse effect on our business, results of operations and financial condition. Our industry is highly competitive and if we are not able to successfully compete, we could lose market share and our revenues could decline. We operate in a highly competitive industry. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. We compete primarily on the basis of technology and performance. For certain products, we also compete on price. Some of our competitors are well-established and have greater market share and manufacturing, financial, research and development and marketing resources than we do. We also compete with emerging companies that are attempting to sell their products in specialized markets, and with the internal capabilities of many of our significant customers, including Honeywell and BAE. There can be no assurance that we will be able to maintain our current market share with respect to any of our products. A loss of market share to our competitors could have a material adverse effect on our business, results of operations and financial condition. In addition, a significant portion of our contracts, including those with the federal government and commercial customers, are subject to commercial bidding, both upon initial issuance and subsequent renewal. If we are unable to successfully compete in the bidding process or if we fail to obtain renewal, our business, results of operations and financial condition could be materially adversely affected. Our industry is characterized by rapid technological change, and if we cannot continue to develop, manufacture and market innovative products that meet customer requirements for performance and reliability, we may lose market share and our net sales may suffer. The process of developing new products for our markets is complex and uncertain, and failure to keep pace with our competitors' technological development, to develop or obtain appropriate intellectual property and to anticipate customers' changing needs and emerging technological trends accurately could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. We must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed. If we do not succeed, we may be left with inventories of obsolete products or we may not have enough of some products available to meet customer demand, which could lead to reduced sales and higher expenses. We design custom products to meet specific requirements of our customers. The amount and timing of revenue from such products can affect our quarterly operating results. The design and sales cycle for our custom products, from initial contact by our sales force to the commencement of shipments of those products in commercial quantities, may be lengthy. In this process, our sales and application engineers work closely with the customer to analyze the customer's system requirements and establish a technical specification for the custom product. We then select a process, evaluate components, and establish assembly and test procedures before manufacturing in commercial quantities can begin. The length of this cycle is influenced by many factors, including the difficulty of the technical specification, the novelty and complexity of the design and the customer's procurement processes. Our customers typically do not commit to purchase significant quantities of the custom product until they are ready to commence volume shipments of their own system or equipment. Our receipt of substantial revenue from sales of a custom product often depends on that customer's commercial success in manufacturing and selling its system or equipment that incorporates our custom product. As a result, a significant period may elapse between our investment of time and resources in designing and developing a custom product and our receipt of substantial revenue from sales of that custom product. The length of this process may increase the risk that a customer will decide to cancel or change its plans related to its system or equipment. Such a cancellation or change in plans by a customer could cause us to lose anticipated sales. In addition, our business, results of operations and financial condition could be materially adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle, chooses not to release its system or equipment that contains our custom products, or is not successful in the sale and marketing of its system or equipment that contains our custom products. Additionally, some customers may be unlikely to change their supplier due to the significant costs associated with qualifying a new supplier and potentially redesigning their system or equipment. So, if we fail to achieve initial design wins in the customer's qualification process, we may not regain the opportunity for significant sales to this customer for a lengthy period of time. Our major customers account for a sizable portion of our revenue, and the loss of, or a reduction in, orders from these customers could result in a decline in revenue. Revenue derived from our 10 largest customers as a percentage of our annual revenue was 34% for the twelve months ended September 30, 2010. Our major customers often use our products in multiple systems or programs, sometimes developed by different business units within the customer's organization, each having differing product life cycles, end customers and market dynamics. While the composition of our top 10 customers varies from year to year, we expect that sales to a limited number of customers will continue to account for a significant percentage of our revenue for the foreseeable future. It is possible that any of our major customers could terminate its purchasing arrangements with us or significantly reduce or delay the amount of our products that it orders, purchase products from our competitors or develop its own products internally. The loss of, or a reduction in, orders from any major customer could cause a decline in our overall revenue and have a material adverse effect on our business, results of operations and financial condition. In the event that certain of our customers encounter financial difficulties and fail to pay us, it could adversely affect our business, results of operations and financial condition. We manufacture products to customer specifications and generally purchase raw materials in response to customer orders. In addition, we may commit significant amounts of capital to maintain inventory in anticipation of customer orders. In the event that our customers for whom we maintain inventory experience financial difficulties, we may be unable to sell such inventory at its current profit margin, if at all. In such an event, our gross margins would decline. In addition, if the financial condition of a significant portion of our customer base deteriorates, resulting in an impairment of their ability to pay us amounts owed in respect of a significant amount of outstanding receivables, our business, results of operations and financial condition could be materially adversely affected. We rely on sales to federal government entities under prime contracts and subcontracts. A loss or reduction of such contracts, a failure to obtain new contracts or a reduction of sales under such contracts could have a material adverse effect on our business. We derived approximately 33% of our net sales for the twelve months ended September 30, 2010 from contracts with agencies of the federal government or subcontracts with prime defense contractors or subcontractors of the federal government. The loss or significant curtailment of any of these government contracts or subcontracts, or failure to exercise renewal options or enter into new contracts or subcontracts, could have a material adverse effect on our business, results of operations and financial condition. Continuation and the exercise of renewal options on existing government contracts and subcontracts and new government contracts and subcontracts are, among other things, contingent upon the availability of adequate funding for the various federal government agencies with which we and prime government contractors do business. Changes in federal government spending could directly affect our financial performance. Among the factors that could impact federal government spending and which would reduce our federal government contracting and subcontracting business are: a significant decline in, or reapportioning of, spending by the federal government; changes, delays or cancellations of federal government programs or requirements; the adoption of new laws or regulations that affect companies that provide services to the federal government; federal government shutdowns or other delays in the government appropriations process; curtailment of the federal government's use of third-party service firms; changes in the political climate, including with regard to the funding or operation of the services we provide; and general economic conditions. If the current presidential administration were to reorder its budgetary priorities resulting in a general decline in U.S. defense spending, it could cause federal government agencies to reduce their purchases under contracts, exercise their rights to terminate contracts in whole or in part, to issue temporary stop work orders or decline to exercise options to renew contracts, all of which could harm our operations and significantly reduce our future revenues. Federal government contracts may be terminated by the federal government at any time prior to their completion and contain other unfavorable provisions, which could lead to unexpected loss of sales and reduction in backlog. Under the terms of federal government contracts, the federal government may unilaterally: terminate or modify existing contracts; reduce the value of existing contracts through partial termination; delay the payment of our invoices by government payment offices; audit our contract-related costs; and suspend us from receiving new contracts pending resolution of any alleged violations of procurement laws or regulations. The federal government can terminate or modify any of its contracts with us or its prime contractors either for its convenience, or if we or its prime contractors default, by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and subcontracts. If the federal government or its prime contractors terminate and/or materially modify any of our contracts or if any applicable options are not exercised, our failure to replace sales generated from such contracts would result in lower sales and could adversely affect our earnings, which could have a material adverse effect on our business, results of operations and financial condition. Our backlog as of September 30, 2010 was approximately $336.1 million, of which approximately 51% represented firm contracts with agencies of the U.S. government or prime defense contractors or subcontractors of the U.S. government. There can be no assurance that any of the contracts comprising our backlog will result in actual sales in any particular period or that the actual sales from such contracts will equal our backlog estimates. Furthermore, there can be no assurance that any contract included in our estimated backlog that generates sales will be profitable. Our business could be adversely affected by a negative audit or other actions, including suspension or debarment, by the federal government. As a federal government contractor, we must comply with and are affected by laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with the federal government and our prime government contractors and subcontractors, and in some instances, impose added costs on our business. Federal government agencies routinely audit and investigate government contractors. These agencies review each contractor's contract performance, cost structure and compliance with applicable laws, regulations and standards. Such agencies also review the adequacy of, and a contractor's compliance with, its internal control systems and policies, including the contractor's purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts. As a federal government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which companies with solely commercial customers are not subject, the results of which could have a material adverse effect on our operations. If we were suspended or prohibited from contracting with the federal government generally, or any significant federal government agency specifically, if our reputation or relationship with federal government agencies were impaired or if the federal government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, results of operations and financial condition could be materially adversely affected. Under some of our government contracts, we are required to maintain secure facilities and to obtain security clearances for personnel involved in performance of the contract, in compliance with applicable federal standards. If we were unable to comply with these requirements, or if personnel critical to our performance of these contracts were to lose their security clearances, we might be unable to perform these contracts or compete for other projects of this nature, which could adversely affect our revenue. Our federal government contracts are subject to competitive bidding, both upon initial issuance and subsequent renewal. If we are unable to successfully compete in the bidding process or if we fail to receive renewal, it could have a material adverse effect on our business, results of operations and financial condition. A significant portion of our federal government contracts are awarded through a competitive bidding process, including upon renewal, and we expect that this will continue to be the case. There often is significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks such as: we must expend substantial funds and time to prepare bids and proposals for contracts, which could detract attention from other parts of our business; we may be unable to estimate accurately the resources and cost that will be required to complete any contract we win, which could result in substantial cost overruns; and we may encounter expense and delay if our competitors protest or challenge awards of contracts to us, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in termination, reduction or modification of the awarded contract. The government contracts for which we compete typically have multiple option periods, and if we fail to win a contract, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts, such failure could have a material adverse effect on our business, results of operations and financial condition. New products are subject to greater technology, design and operational risks, and a delay in introducing new products could harm our competitive position. Our future success is highly dependent upon the timely development and introduction of competitive new products at acceptable margins. However, there are greater design and operational risks associated with new products. The inability of our suppliers to produce advanced products, delays in commencing or maintaining volume shipments of new products, the discovery of product, process, software, or programming defects or failures and any related product returns could each have a material adverse effect on our business, financial condition, and results of operation. We have experienced from time to time in the past, and expect to experience in the future, difficulties and delays in achieving satisfactory, sustainable yields on new products. Yield problems increase the cost of our new products as well as the time it takes us to bring them to market, which can create inventory shortages and dissatisfied customers. Any prolonged inability to obtain adequate yields or deliveries of new products could have a material adverse effect on our business, results of operations and financial condition. Our failure to detect unknown defects in our products could materially harm our relationship with customers, our reputation and our business. We may not be able to anticipate all of the possible performance or reliability problems that could arise with our existing or new products, which could result in significant product liability or warranty claims. In addition, any defects found in our products could result in a loss of sales or market share, failure to achieve market acceptance, injury to our reputation, indemnification claims, litigation, increased insurance costs and increased service costs, any of which could discourage customers from purchasing our products and materially harm our business. Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in these agreements may not be effective as a result of federal, state or local laws, or ordinances or unfavorable judicial decisions in the United States or other countries. The insurance we maintain to protect against claims associated with the use of our products may not adequately cover all claims asserted against us. In addition, even if ultimately unsuccessful, such claims could result in costly litigation, divert our management's time and resources, and damage our customer relationships. Our AMS segment depends on third-party contractors to fabricate semiconductor products and we outsource other portions of our business; a failure to perform by these third parties may adversely affect our ability to bring products to market and damage our reputation. As part of our efforts to minimize the amount of required capital investment in facilities, equipment and labor and increase our ability to quickly respond to changes in technology and customer requirements, our AMS segment outsources its semiconductor fabrication processes and we outsource certain other manufacturing and engineering functions to third parties. This reliance on third-party manufacturers and engineers involves significant risks, including lack of control over capacity allocation, delivery schedules, the resolution of technical difficulties and the development of new processes. We rely heavily on our third-party manufacturers to be able to deliver materials, know-how and technology to us without encumbrances. Disputes regarding the ownership of or rights in certain third-party intellectual property may preclude our third-party manufacturers from fulfilling our requirements at a reasonable cost or, in some cases, at all. A shortage of raw materials or production capacity could lead any of our third-party manufacturers to allocate available capacity to other customers, or to internal uses. If these third parties fail to perform their obligations in a timely manner or at satisfactory quality and cost levels, our ability to bring products to market and our reputation could suffer and our costs could increase. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers' orders on a timely basis, which could lead to a loss in sales. The ability of these third parties to perform is largely outside of our control. Non-performance by our suppliers may adversely affect our operations. Because we purchase various types of raw materials and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected. This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers. Our efforts to protect against and to minimize these risks may not always be effective. We may occasionally seek to engage new suppliers with which we have little or no experience. The use of new suppliers can pose technical, quality and other risks. We use specialized technologies and know-how to design, develop and manufacture our products. Our inability to protect our intellectual property could hurt our competitive position, harm our reputation and adversely affect our results of operations. As a technology company, we rely on our patents, trademarks, copyrights, trade secrets, and proprietary know-how and concepts. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyrights and trade secret laws, as well as confidentiality agreements. Because of the differences in foreign trademark, copyright, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition. We believe that while the protection afforded by patent, trademark, copyright and trade secret laws may provide some advantages, the competitive position of participants in our industry is principally determined by such factors as the technical and creative skills of their personnel, the frequency of their new product developments and their ability to anticipate and rapidly respond to evolving market requirements. To the extent that a competitor effectively uses its intellectual property portfolio, including patents, to prevent us from selling products that allegedly infringe such competitor's products, our results of operations could be materially adversely affected. We have from time to time applied for patent protection relating to certain existing and proposed products, processes and services, but we do not have an active patent application strategy. When we do apply for patents, we generally apply in those countries where we intend to make, have made, use or sell patented products; however, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that any of our patent applications will be approved. We also cannot assure you that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our United States patents. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents. Some of our proprietary technology may have been developed under, or in connection with, U.S. government contracts or other federal funding agreements. With respect to technology developed under such agreements, the U.S. government may retain a nonexclusive, non-transferable, irrevocable, paid-up license to use the technology on behalf of the United States throughout the world. In addition, the U.S. government may obtain additional rights to such technology, or our ability to exploit such technology may be limited. We rely on our trademarks, tradenames and brand names to distinguish our products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources towards marketing new brands. Further, we cannot assure you that we will have adequate resources to enforce our trademarks. We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our sales could decrease. If third parties claim that we infringe upon or misappropriate their intellectual property rights, our net sales, gross margins and expenses could be adversely affected. We face the risk of claims that we have infringed or misappropriated third parties' intellectual property rights. We are currently involved in various litigation matters involving claims of patent infringement and trade secret misappropriation. Any claims of patent or other intellectual property infringement, even those without merit, could: be expensive and time consuming to defend; cause us to cease making or using products that incorporate the challenged intellectual property; require us to redesign, reengineer or rebrand our products, if feasible; divert management's attention and resources; and require us to enter into licensing agreements in order to obtain the right to use a third party's intellectual property. Any licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license agreements, or stop the sale of certain products, which could adversely affect our net sales, gross margins and expenses and harm our future prospects. Many patent applications in the United States are maintained in secrecy for a period of time after they are filed, and therefore there is a risk that we could adopt a technology without knowledge of a pending patent application, which technology would infringe a third party patent once that patent is issued. We license third-party technologies for the development of certain of our products, and if we fail to maintain these licenses or are unable to secure alternative licenses on reasonable terms, our business could be adversely affected. We license third-party technologies that are integrated into certain of our products. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to make these products could be harmed. In addition, licensed technology may be subject to claims that it infringes others' technology, and we may lose access to or have restrictions placed on our use of the licensed technology. Certain technology, which we license, has been, or is currently, subject to such claims. Our licenses of third-party technologies have certain requirements that we must meet to maintain the license. For instance, if we fail to meet certain minimum royalty or purchase amounts, or meet delivery deadlines, certain licenses may be converted from an exclusive license to a non-exclusive license, thus allowing the licensors to license the technology to our competitors. We cannot guarantee that third-party technologies that we license will not be licensed to our competitors. In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all. As part of our business strategy, we may complete acquisitions or divest non-strategic businesses and product lines and undertake restructuring efforts. These actions could adversely affect our business, results of operations and financial condition. As part of our business strategy, we engage in discussions with third parties regarding, and enter into agreements relating to, acquisitions, joint ventures and divestitures in order to manage our product and technology portfolios and further our strategic objectives. We also continually look for ways to increase the profitability of our operations through restructuring efforts and to consolidate operations across facilities where synergies exist. In order to pursue this strategy successfully, we must identify suitable acquisition, alliance or divestiture candidates, complete these transactions, some of which may be large and complex, and integrate acquired companies. Integration and other risks of acquisitions can be more pronounced for larger and more complicated transactions, or if multiple acquisitions are pursued simultaneously. The integration of acquisitions may make the completion and integration of subsequent acquisitions more difficult. However, if we fail to identify and complete these transactions, we may be required to expend resources to internally develop products and technology or may be at a competitive disadvantage or may be adversely affected by negative market perceptions, which may have a material adverse effect on our business, results of operations and financial condition. Acquisitions may require us to integrate different company cultures, management teams and business infrastructures and otherwise manage integration risks. Even if an acquisition is successfully integrated, we may not receive the expected benefits of the transaction. A successful sale or divestiture depends on various factors, including our ability to effectively transfer assets and liabilities, contracts, facilities and employees to the purchaser, identify and separate the intellectual property to be divested from the intellectual property that we wish to keep and reduce fixed costs previously associated with the divested assets of the business. Managing acquisitions and divestitures requires varying levels of management resources, which may divert management's attention from our other business operations. Acquisitions, including abandoned acquisitions, also may result in significant costs and expenses and charges to earnings. Restructuring activities may result in business disruptions and may not produce the full efficiency and cost reduction benefits anticipated. Further, the benefits may be realized later than expected and the cost of implementing these measures may be greater than anticipated. If these measures are not successful, we may need to undertake additional cost reduction efforts, which could result in future charges. Moreover, we could experience business disruptions with customers and elsewhere if our cost reduction and restructuring efforts prove ineffective, and our ability to achieve our other strategic goals and business plans as well as our business, results of operations and financial condition could be materially adversely affected. We rely on the significant experience and specialized expertise of our senior management and engineering staff and must retain and attract qualified engineers and other highly skilled personnel in order to grow our business successfully. Our performance is substantially dependent on the continued services and performance of our senior management and our highly qualified team of engineers, many of whom have numerous years of experience and specialized expertise in our business. In order to be successful, we must retain and motivate executives and other key employees, including those in managerial, technical, marketing and information technology support positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Attracting and retaining skilled workers and qualified sales representatives is also critical to us. Experienced management and technical, marketing and support personnel in the microelectronics and test solutions industries are in demand and competition for their talents is intense. Employee retention may be a particularly challenging issue following acquisitions or divestitures since we also must continue to motivate employees and keep them focused on our strategies and goals, which may be particularly difficult due to the potential distractions related to integrating the acquired operations or divesting businesses to be sold. If we lose the services of any key personnel, our business, results of operations and financial condition could be materially adversely affected. We may be required to make significant payments to members of our management in the event their employment with us is terminated. We are a party to employment agreements with each of Leonard Borow, our President and Chief Executive Officer, John Buyko, our Executive Vice President and President of our AMS division, John Adamovich, our Chief Financial Officer and Senior Vice President, Charles Badlato, our Vice President Treasurer, and Carl Caruso, our Vice President Manufacturing. In the event we terminate the employment of any of these executives, or in certain cases, if such executives terminate their employment with us, such executives will be entitled to receive certain severance and related payments. At October 30, 2010 the maximum aggregate amount payable by us to Messrs. Borow, Buyko, Adamovich, Badlato and Caruso upon the termination of their respective employment agreements with us is $14.6 million. We rely on our information technology systems to manage numerous aspects of our business and a disruption of these systems could adversely affect our business. Our information technology, or IT, systems are an integral part of our business. We depend on our IT systems for scheduling, sales order entry, purchasing, materials management, accounting and production functions. Our IT systems also allow us to ship products to our customers on a timely basis, maintain cost-effective operations and provide a high level of customer service. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities. A serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently, which in turn could have a material adverse effect on our business, results of operations and financial condition. Due to the international nature of our business, political or economic changes could harm our future sales, expenses and financial condition. Our future sales, costs and expenses could be adversely affected by a variety of international factors, including: changes in a country's or region's political or economic conditions; longer accounts receivable cycles; trade protection measures; unexpected changes in regulatory requirements; differing technology standards and/or customer requirements; and import or export licensing requirements, which could affect our ability to obtain favorable terms for components or lead to penalties or restrictions. For the twelve months ended September 30, 2010, sales of our products to foreign customers accounted for approximately 43% of our net sales. As of September 30, 2010, we employed approximately 810 employees overseas. In addition, a portion of our product and component manufacturing, along with key suppliers, is located outside of the United States, and also could be disrupted by some of the international factors described above. Certain of our products may be controlled by the International Traffic in Arms Regulations and the Export Administration Regulations, which may adversely affect our business, results of operations and financial condition. We are subject to the International Traffic in Arms Regulations, or ITAR. The ITAR requires export licenses from the U.S. Department of State for products shipped outside the U.S. that have military or strategic applications. In this connection, we have filed certain Voluntary Disclosures with the Directorate of Defense Trade Controls, U.S. Department of State describing possible inadvertent violations involving, among other things, the unlicensed export of controlled products to end-users in a number of countries, including China and Russia. We have also identified ITAR noncompliance in the pre-acquisition business activities of certain recently acquired companies. These matters have been formally disclosed to the U.S. Department of State. Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time. In the event that a determination is made that we or any entity we have acquired has violated the ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of our export privileges and criminal sanctions, which may have a material adverse effect on our business, results of operations and financial condition. We are also subject to the Export Administration Regulations, or EAR. The EAR regulates the export of certain "dual use" items and technologies and, in some instances, requires a license from the U.S. Department of Commerce. We are exposed to foreign currency exchange rate risks that could adversely affect our business, results of operations and financial condition. We are exposed to foreign currency exchange rate risks that are inherent in our sales commitments, anticipated sales, and assets and liabilities that are denominated in currencies other than the U.S. dollar. Our exposure to foreign currency exchange rates relates primarily to the British pound and the Euro. For the twelve months ended September 30, 2010, sales of our products to foreign customers accounted for approximately 43% of our net sales. In addition, a portion of our product and component manufacturing, along with key suppliers, are located outside of the United States. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could have a material adverse effect on our business, results of operations and financial condition. Compliance with and changes in environmental, health and safety laws regulating the present and past operations of our business and the business of predecessor companies could increase the costs of producing our products and expose us to environmental claims. Our business is subject to numerous federal, state, local and foreign laws and regulations concerning environmental, health and safety matters, including those relating to air emissions, wastewater discharges and the generation, handling, use, storage, transportation, treatment and disposal of, or exposure to, hazardous substances. Violations of such laws and regulations can lead to substantial fines and penalties and other civil or criminal sanctions. We incur costs associated with compliance with these laws and regulations and we face risks of additional costs and liabilities including those related to the investigation and remediation of, or claims for personal injuries or property damages associated with, past or present contamination, at current as well as former properties utilized by us and at third-party disposal sites, regardless of fault or the legality of the original activities that led to such contamination. In addition, future developments, such as changes in laws and regulations or the enforcement thereof, more stringent enforcement or interpretation thereof and claims for property damage or personal injury could cause us to incur substantial losses or expenditures. Although we believe we are materially compliant with all applicable current laws and regulations, any new or modified laws or regulations, or the discovery of any currently unknown non-compliance or contamination, could increase the cost of producing our products, which could have a material adverse effect on our business, results of operations and financial condition. Efforts to comply with the Sarbanes-Oxley Act of 2002 will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us. The Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the Securities and Exchange Commission that are applicable to us have increased the scope, complexity and cost of our corporate governance, reporting and disclosure practices. We could also experience greater outside and internal costs as a result of our continuing efforts to comply with the Sarbanes-Oxley Act, including Section 404. The effort to comply with these obligations may divert management's attention from other business concerns, which could adversely affect our operating performance. In addition, we may identify significant deficiencies or material weaknesses that we cannot remedy in a timely manner. We are subject to unanticipated market conditions that could adversely affect our available working capital and financial position. We hold investments in certain auction rate securities, or ARS. Beginning in February 2008, auctions for the resale of ARS have ceased to reliably support the liquidity of these securities. We cannot be certain that liquidity will be restored in the foreseeable future or at all. We may not be able to access cash by selling these securities for which there is insufficient demand without a loss of principal until a future auction for these investments is successful, a secondary market emerges, they are redeemed by their issuer or they mature. These securities are classified as non-current assets. In addition, the value of such investments could potentially be impaired on a temporary or other-than-temporary basis. If it is determined that the value of the investment is impaired on an other-than-temporary basis, we would be required to write down the investment to its fair value and record a charge to earnings for the amount of the impairment. As of September 30, 2010, we held ARS with a par value of $11.1 million and a fair value of $9.8 million. Changes in tax rates or policies or changes to our tax liabilities could affect operating results. We are subject to taxation in the United States and various other countries, including the United Kingdom, Sweden, Germany and China. Significant judgment is required to determine and estimate our worldwide tax liabilities and our future annual and quarterly tax rates could be affected by numerous factors, including changes in the applicable tax laws, composition of earnings in countries or states with differing tax rates, repatriation of foreign earnings to the United States or our valuation and utilization of deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other taxing authorities. Although we believe our tax estimates are reasonable, we regularly evaluate the adequacy of our provision for income taxes, and there can be no assurance that any final determination by a taxing authority will not result in additional tax liability which could have a material adverse effect on our results of operations. Accounting standards periodically change and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain. The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our consolidated financial statements can be difficult to predict and can materially impact how we record and report our results of operations and financial condition. In addition, our management must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our results of operations and financial condition and may require management to make difficult, subjective or complex judgments about matters that are uncertain. Our operations are subject to business interruptions and casualty losses. Our business is subject to numerous inherent risks, particularly unplanned events such as inclement weather, explosions, fires, terrorist acts, other accidents, equipment failures and transportation interruptions. While our insurance coverage could offset losses relating to some of these types of events, our business, results of operations and financial condition could be materially adversely affected to the extent any such losses are not covered by our insurance. FORWARD-LOOKING STATEMENTS This prospectus contains

parsed_sections/risk_factors/2010/CIK0000027748_dgt_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Prospective investors should carefully consider the following risk factors, together with the other information contained in this Prospectus, in evaluating the Company and its business before purchasing our securities. In particular, prospective investors should note that this Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act ) and that actual results could differ materially from those contemplated by such statements. The factors listed below represent certain important factors which we believe could cause such results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. Recent and future economic conditions, including turmoil in the financial and credit markets, may adversely affect our business. Recent economic conditions may adversely affect our business, including as a result of the potential impact on the medical imaging and power conversion system industries, our customers, our financing and other contractual arrangements. In addition, conditions may remain depressed in the future or may be subject to further deterioration. Recent or future developments in the U.S. and global economies may lead to a reduction in spending on the products we provide, which could have an adverse impact on sales of our products. Although on September 1, 2010, we completed a mortgage financing on our property in Bay Shore, New York, and received approximately $2.5 million payable over 10 years at an annual rate of interest of 4.9%, the tightening of the credit markets and recent or future turmoil in the financial markets could also make it more difficult for us to refinance our existing Italian credit facility, to enter into agreements for indebtedness or to obtain funding through the issuance of the Company s securities. Specifically, the tightening of the credit markets and turmoil in the financial markets could make it more difficult or impossible for us to obtain financing. Worsening economic conditions could also result in difficulties for financial institutions (including bank failures) and other parties that we may do business with, which could potentially, impair our ability to access financing under our Italian credit facility or to otherwise recover amounts as they become due under our other contractual arrangements. We do not intend to pay dividends on shares of our common stock in the foreseeable future. We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes Oxley Act of 2002, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities, which could harm our business prospects. Our common stock has been delisted from the Nasdaq national market and we cannot predict when or if it ever will be listed on any national securities exchange. Due to our past failure to comply with the United States Securities Laws, our common stock was suspended from trading on the NASDAQ National Market in December 2000 because we had not filed an Annual Report for the year ended July 29, 2000 within the SEC s prescribed time period. Current pricing information on our common stock has been available on the Table of Contents Over the Counter Bulletin Board (the OTCBB ). The OTCBB is an over-the-counter market which generally provides significantly less liquidity than established stock exchanges and quotes for stocks included in the OTCBB are not listed in the financial sections of newspapers. Therefore, prices for securities traded solely in the OTCBB may be difficult to obtain, and shareholders may find it difficult to resell their shares. In order to be re-listed, we will need to meet certain listing requirements. There can be no assurance that we will be able to meet such listing requirements. Failure by us to adhere to our administrative agreement with the defense logistics agency could result in our debarment from doing business with the U.S. government. On April 5, 2005, the Company announced that it had reached an administrative agreement with the U.S. Defense Logistics Agency (the DLA ), a component of the U.S. Department of Defense (the DOD ), which provides that RFI will not be debarred from doing business with the U.S. Government entities as long as RFI maintains its compliance program and adheres to the terms of the administrative agreement. If RFI fails to maintain its compliance program or RFI or the Company fails to adhere to the terms of the administrative agreement, the DLA could debar the Company from doing business with U.S. Government entities. On May 24, 2007, the Company s RFI subsidiary was served with a subpoena to testify before a grand jury of the United States District Court, Eastern District of New York and to provide items and records from its Bay Shore, New York offices in connection with U.S. DOD contracts. A search warrant from the United States District Court, Eastern District of New York was issued and executed with respect to such offices. The Company believes that it is in full compliance with the quality standards that its customers require and is fully cooperating with investigators to assist them with their review. The Company s RFI subsidiary is continuing to ship products to the U.S. Government as well as to its commercial customers. Our business is based on technology that is not protected by patent or other rights. The technology and designs underlying our products are unprotected by patent rights. Our future success is dependent primarily on unpatented trade secrets and on the innovative skills, technological expertise and management abilities of our employees. Because we do not have patent rights in our products, our technology may not preclude or inhibit competitors from producing products that have identical performance as our products. In addition, we cannot guarantee that any protected trade secret could ultimately be proven valid if challenged. Any such challenge, with or without merit, could be time consuming to defend, result in costly litigation, divert management s attention and resources and, if successful, require us to pay monetary damages. We may not be able to compete successfully. A number of foreign and domestic companies have developed, or are expected to develop, products that compete or will compete with our products. Many of these competitors offer a range of products in areas other than those in which we compete, which may make such competitors more attractive to hospitals, radiology clients, general purchasing organizations and other potential customers. In addition, many of our competitors and potential competitors are larger and have greater financial resources than we do and offer a range of products broader than our products. Some of the companies with which we now compete or may compete in the future have or may have more extensive research, marketing and manufacturing capabilities and significantly greater technical and personnel resources than we do, and may be better positioned to continue to improve their technology in order to compete in an evolving industry. Our delay or inability to obtain any necessary U.S. or foreign regulatory clearances or approvals for our products could harm our business and prospects. Our medical imaging products are the subject of a high level of regulatory oversight. Any delay in our obtaining or our inability to obtain any necessary U.S. or foreign regulatory approvals for new products could harm our business and prospects. There is a limited risk that any approvals or clearances, once obtained, may be withdrawn or modified which could create delays in shipping our product, pending re-approval. Medical devices cannot be marketed in the U.S. without clearance or approval by the FDA. Our Medical Systems Group business must be operated in compliance with FDA Good Manufacturing Practices, which regulate the design, manufacture, packing, storage and installation of medical devices. Our manufacturing facilities and business practices are subject to periodic regulatory audits and quality certifications and we do self audits to monitor our compliance. In general, corrective actions required as a result of these audits do not have a significant impact on our manufacturing operation; however there is a limited risk that delays caused by a potential response to extensive corrective actions could impact our operations. Virtually all of our products manufactured or sold overseas are also subject to approval and regulation by foreign regulatory and safety agencies. If we do not obtain these approvals, we could be precluded from selling our products or required to make modifications to our products which could delay bringing our products to market. Table of Contents We must rapidly develop new products in order to compete effectively. Technology in our industry, particularly in the x-ray and medical imaging businesses, evolves rapidly, and making timely product innovations is essential to our success in the marketplace. The introduction by our competitors of products with improved technologies or features may render our existing products obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our products do not perform well, our business and financial condition will be adversely affected. Also, our new products may contain defects or errors which give rise to product liability claims against us or cause the products to fail to gain market acceptance. It is generally accepted that digital radiography will become the dominant technology used in hospitals and imaging clinics throughout the world over the next 10 to 15 years. Currently, there are a number of competing technologies available in connection with the digitization of x-ray images. However, due to the high cost of this technology, many institutions have not yet adopted digital technology. In addition, there is uncertainty as to which technology system will be accepted as the industry leading protocol for image digitization and communication. Lack of an adequate digital capability could impact our business and result in a loss of market share. A shortage of an adequate supply of raw materials could increase our costs and cause a delay in our ability to ship product and fulfill orders. A large portion of our manufacturing costs consist of the cost of materials and an increase in these costs could adversely impact our gross margins. We rely on external sources to supply raw materials, which consist primarily of mechanical subassemblies, electronic components, x-ray tubes and x-ray generators in the Medical Systems Group and electronic components and subassemblies and metal enclosures for its products in the Power Conversion Group. Our ability to meet future demand and manufacture our product is dependent on these sources of supply. If disruptions in these sources of supply cause shortages of raw materials, our ability to ship products to customers will be impacted. In addition, due to the high material cost component of our manufactured goods, our gross margins would be adversely impacted by increases in raw material costs we may be unable to pass along to our customers due to market conditions. Due to the significance of our international operations, political or economic changes in the various countries or regions we manufacture in or sell our products to could impact our financial condition. International sales, including products manufactured at our facility in Milan, Italy, comprised 78% and 73% of consolidated revenues for fiscal years 2010 and 2009, respectively. Our future results could be adversely affected by a variety of international risks, including unfavorable foreign currency exchange rates; difficulties in managing and staffing international operations, political or social unrest; economic instability or natural disasters; environmental or trade protection measures; changes in governmental or other entities buying patterns and tender order procedures; changes in other regulatory or certification requirements. In addition, any changes in Italian tax laws including changes in withholding on dividends from our Italian subsidiary or other restrictions on transfers of funds to the U.S. could impact our financial condition. We may not be able to obtain financing. The Company does not currently have a U.S. credit facility to finance working capital needs. Management believes that if financing is needed, they would be able to obtain new asset based financing on the Company s U.S. subsidiary. In addition, the Company may be able to dividend necessary funds from its foreign subsidiary, although this is not planned. Although on September 1, 2010, the Company completed a mortgage financing on our property in Bay Shore, New York, and received approximately $2.5 million payable over 10 years at an annual rate of interest of 4.9%, the Company can make no assurances that it will be able to obtain additional financing in the future on terms favorable to the Company or at all. We must conduct our business operations without infringing on the proprietary rights of third parties. Although we believe our products do not infringe on the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted against us in the future or that, if asserted, any infringement claim will be successfully defended. A successful claim, or any claim, against us could distract our management s attention from other business concerns and adversely affect our business, financial condition and results of operations. There is a risk that our insurance will not be sufficient to protect us from product liability claims, or that in the future product liability insurance will not be available to us at a reasonable cost, if at all. Our business involves the risk of product liability claims inherent to the business. We maintain product liability insurance subject to certain deductibles and exclusions. There is a risk that our insurance will not be sufficient to protect us from product liability claims, or that product liability insurance will not be available to us at a reasonable cost, if at all. An uninsured or underinsured claim could materially harm our operating results or financial condition. Table of Contents We face risks associated with handling hazardous materials and products. Our research and development activity involves the controlled use of hazardous materials, such as toxic and carcinogenic chemicals. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any resulting damages, and such liability could be extensive. We are also subject to substantial regulation relating to occupational health and safety, environmental protection, hazardous substance control and waste management and disposal. The failure to comply with such regulations could subject us to, among other things, fines and criminal liability. Our business could be harmed if our products contain undetected errors or defects or do not meet customer specifications. We are continuously developing new products and improving our existing products. Newly introduced or upgraded products can contain undetected errors or defects. In addition, these products may not meet their performance specifications under all conditions or for all applications. If, despite our internal testing and testing by our customers, any of our products contains errors or defects, or any of our products fails to meet customer specifications, we may be required to recall or retrofit these products. We may not be able to do so on a timely basis, if at all, and may only be able to do so at considerable expense. In addition, any significant reliability problems could result in adverse customer reaction and negative publicity and could harm our business and prospects. The seasonality of our revenue may adversely impact the market prices for our shares. Our revenue is typically lower during the first quarter of each fiscal year due to the shut-down of operations in our Milan, Italy and Bay Shore, New York facilities for part of August. This seasonality causes our operating results to vary from quarter to quarter and these fluctuations could adversely affect the market price of our common stock. A significant number of our shares will be available for future sale and could depress the market price of our stock. As of October 25, 2010, an aggregate of 22,718,306 shares of our common stock were outstanding. In addition, as of October 25, 2010 there were outstanding options to purchase 2,432,565 shares of our common stock, 2,063,936 of which were fully vested. Upon exercise of all rights offered hereunder, an additional 24,999,224 shares of common stock will be outstanding. Sales of large amounts of our common stock in the market could adversely affect the market price of the common stock and could impair our future ability to raise capital through offerings of our equity securities. A large volume of sales by holders exercising options could have a significant adverse impact on the market price of our common stock. We have a limited trading market and our stock price may be volatile. There is a limited public trading market for our common stock in the Over-the-Counter OTC Market. We cannot assure you that a regular trading market for our common stock will ever develop or that, if developed, it will be sustained. The experiences of other small companies indicate that the market price for our common stock could be highly volatile. Many factors could cause the market price of our common stock to fluctuate substantially, including: future announcements concerning us, our competitors or other companies with whom we have business relationships; changes in government regulations applicable to our business; overall volatility of the stock market and general economic conditions; changes in our earnings estimates or recommendations by analysts; and changes in our operating results from quarter to quarter. Accordingly, substantial fluctuations in the price of our common stock could limit the ability of our current shareholders to sell their shares at a favorable price. The company may submit, from time to time, proposals to shareholders to amend the company s certificate of incorporation or to increase the number of common shares authorized. At a special meeting of shareholders of the Company held on November 17, 2006, our shareholders approved an Amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of our common stock, par value $0.10 per share, from twenty million (20,000,000) shares to fifty million Table of Contents (50,000,000) shares on October 13, 2010 at the Special Meeting, our shareholders approved an Amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of our common stock, par value $0.10 per share, from fifty million (50,000,000) to one hundred million (100,000,000) shares and in order to have a sufficient number of shares of common stock to complete the rights offering and to provide a reserve of shares available for issuance to meet business needs as they may arise in the future. Such business needs may include, without limitation, rights offerings, financings, acquisitions, establishing strategic relationships with corporate partners, providing equity incentives to employees, officers or directors, stock splits or similar transactions. On October 13, 2010 at the Special Meeting, our shareholders approved a one-for-50 reverse stock split and four-for-one forward stock split. If the Board of Directors, in its sole discretion, decides to implement (which the Board of Directors will not implement, if at all, earlier than the completion of this rights offering) them, the number of authorized shares of our common stock will not change by virtue of the one-for-50 reverse stock split and four-for-one forward stock split and the Company will have additional shares of common stock which may be issued. Issuances of any additional shares for these or other reasons could prove dilutive to current shareholders or deter changes in control of the Company, including transactions where the shareholders could otherwise receive a premium for their shares over then current market prices. The shares purchased by you in this offering may be cashed out pursuant to the proposed one-for-50 reverse stock split or four-for-one forward stock split. On October 13, 2010 at the Special Meeting, our shareholders approved a reverse stock split of one-for-50 followed by a forward stock split of four-for-one. The Board of Directors intends to implement the one-for-50 reverse stock split and four-for-one forward stock split following the completion of this offering, but in no case earlier than the completion of this offering. In both the one-for-50 reverse stock split and four-for-one forward stock split, the Board of Directors intends to cash out fractional shares at a price equal to the average closing sale price of shares of common stock for the ten trading days immediately prior to the date the one-for-50 reverse stock split and four-for-one forward stock split become effective, or, if no such sale takes place on such days, the average of the closing bid and ask prices for such days, in each case as officially reported by Over The Counter Bulletin Board (the Cash Out Price ). If the shares currently held by you and the shares purchased by you in this offering result in a fractional interest following the one-for-50 reverse stock split and four-for-one forward stock split, then such fractional interests will be cashed out at the Cash Out Price, which may be less than or greater than the Subscription Price. We estimate that fractional interests equaling approximately 10,000 shares in the aggregate will be cashed out for approximately $7,200. The subscription price determined for this offering is not an indication of our value. In determining the subscription price for this rights offering, a Special Committee of our board of directors has been established. In setting the subscription price, the Special Committee will review and consider a number of factors, including the amount of proceeds desired, our need for equity capital, alternatives available to us for raising equity capital, the historic and current market price and liquidity of our common stock, the pricing of similar transactions, the historic volatility of the market price of our common stock, the historic trading volume of our common stock, our business prospects, our recent and anticipated operating results and general conditions in the securities market and others. The subscription price will not necessarily bear any relationship to the book value of our assets, net worth, past operations, cash flows, losses, financial condition, or any other established criteria for valuing Del Global. As of November 2, the day prior to the effectiveness of the registration statement to which this offering relates and which included the subscription price, the per share subscription price was approximately 75% of the market value of our common stock. You should not consider the subscription price as an indication of the value of Del Global or our common stock. The subscription price for the offering is significantly less than the market value of our common stock and may result in a decrease in the market value of our common stock. The market value of our common stock on November 2, 2010, the day immediately prior to the effectiveness of the registration statement to which this offering relates was $0.80. The subscription price for this offering is $0.60, a 25% discount to the market value of our common stock on November 2, 2010. The 25% discount, together with the number of shares of common stock we propose to issue and ultimately will issue if this rights offering is completed, may result in an immediate decrease in the market value of our common stock to an amount equal to or less than the $0.60 subscription price. Your purchase of shares in the rights offering may be at a price higher than the market price. If you exercise your subscription rights and the market price of the common stock falls below the subscription price, then you will have committed to buy shares of common stock in the rights offering at a price that is higher than the market price. Moreover, we cannot assure you that you will ever be able to sell shares of common stock that you purchased in the rights offering at a price equal to or greater than the subscription price. Until certificates are delivered upon expiration of the rights offering, you may not be able to sell the shares of our common stock that you purchase in the rights offering. Certificates representing shares of our common stock that you purchased will be delivered as soon as practicable after expiration of the rights offering. Certificates representing shares purchased in the rights offering will be issued within five business days after expiration of the rights offering. We will not pay you interest on funds delivered to the subscription agent pursuant to the exercise of rights. Table of Contents If you do not exercise your subscription rights in full, your percentage ownership and voting rights in Del Global will likely experience dilution. If you choose not to exercise your subscription rights you will retain your current number of shares of common stock of Del Global. However, if you choose not to exercise your subscription rights, your percentage ownership and voting rights in Del Global will experience dilution if and to the extent that other shareholders exercise their subscription rights. In that event, the percentage ownership, voting rights and other rights of all shareholders who do not fully exercise their subscription rights will be diluted. If Steel Partners Holdings L.P. exercises all of its basic subscription rights and subscribes in the rights offering and no other shareholders exercise any of their basic subscription rights, then Steel Partners Holdings L.P. will beneficially own approximately 47.4% of the outstanding shares of the Company s common stock. Assuming that Steel Partners Holdings L.P. exercises in full its basic subscription rights and such portion of its oversubscription rights so as not to jeopardize the Company s net operating losses and capital loss carryforwards and all other rights offered in the offering were exercised by third parties unaffiliated with Steel Partners Holdings L.P., Steel Partners Holdings L.P. could acquire as much as 12,500,000 of the newly issued shares without exceeding the Section 382 threshold, which including the 6,812,234 shares owned by Steel Partners Holdings L.P. prior to the offering, equals approximately 40.47% of our issued and outstanding shares following a fully subscribed offering. Assuming no other shareholder were to exercise its rights and Steel Partners Holdings L.P. were to exercise all of its basic subscription rights in the rights offering and such portion of its oversubscription rights as would not jeopardize the Company s net operating losses and capital loss carryforwards, Steel Partners Holdings L.P. could acquire approximately 15,200,000 of the newly issued shares, which including the 6,812,234 shares owned by Steel Partners Holdings L.P. prior to the offering, would equal approximately 58.05% of our issued and outstanding shares following such offering. The amount of rights which Steel Partners Holdings L.P. can actually exercise in the offering without jeopardizing the Company s net operating losses and capital loss carryforwards will depend on the actual number of rights exercised by unaffiliated third parties and will be between 12,500,000 and 15,200,000. To the extent that all holders including Steel Partners Holdings L.P. exercise all of their basic subscription rights then the percentage ownership of each shareholder, including Steel Partners Holdings L.P., will remain unchanged. Depending on the level of participation in the rights offering, Steel Partners Holdings L.P. may be able to exercise substantial control over matters requiring shareholder approval upon completion of the offering. As of November 2, the day prior to the effectiveness of the registration statement to which this offering relates, Steel Partners Holdings L.P. collectively beneficially owned approximately 30% of the outstanding shares of the Company s common stock. As a shareholder as of the record date, Steel Partners Holdings L.P. will have the right to subscribe for and purchase shares of our common stock under both the basic subscription and oversubscription rights provided by the rights offering. Steel Partners Holdings L.P. has indicated to the Company that it intends to exercise all of its basic subscription rights, but has not made any formal commitment to do so. Steel Partners Holdings L.P. has also indicated that it intends to over-subscribe for the maximum amount of shares it can over-subscribe for without endangering the availability of the Company s net operating losses and capital loss carryforwards under Section 382 of the Internal Revenue Code. However, there is no guarantee or commitment that Steel Partners Holdings L.P. will ultimately decide to exercise any of its rights, including its basic subscription or oversubscription rights. If Steel Partners Holdings L.P. exercises its rights in the rights offering and a significant number of other shareholders do not exercise their rights, the ownership percentage of Steel Partners Holdings L.P. following completion of the offering may increase to greater than 50% of the outstanding shares of the Company s common stock. If this were to occur, Steel Partners Holdings L.P. would be able to exercise substantial control over matters requiring shareholder approval. Your interests as a holder of common stock may differ from the interests of Steel Partners Holdings L.P. You may not revoke your subscription exercise, even if the rights offering is extended up until February 14, 2011, and could be committed to buying shares above the prevailing market price. Once you exercise your subscription rights, you may not revoke the exercise. If we decide to extend the duration of the rights offering you still may not revoke the exercise of your subscription rights. The public trading market price of our common stock may decline before the subscription rights expire. If you exercise your subscription rights and, afterwards, the public trading market price of our common stock falls below the subscription price, you will have committed to buying shares of common stock at a price above the market price. Moreover, you may be unable to sell your shares of our common stock at a price equal to or greater than the price you paid for such shares. Because we may terminate the offering at any time prior to the expiration date, your participation in the rights offering is not assured. We do not intend, but have the right, to terminate the offering at any time prior to the expiration date. If we determine to terminate the offering, we will not have any obligation with respect to the subscription rights except to return any money received from subscribing shareholders as soon as practicable, without interest or deduction. Table of Contents You will need to act promptly and to carefully follow the subscription instructions, or your exercise of rights may be rejected. Shareholders who desire to purchase shares in the rights offering must act promptly to ensure that all required forms and payments are actually received by the subscription agent prior to 5:00 pm on December 14, 2010, the expiration date. If you are a beneficial owner of shares, you must act promptly to ensure that your broker, custodian bank or other nominee acts for you and that all required forms and payments are actually received by the subscription agent prior to the expiration date. We shall not be responsible if your broker, custodian or nominee fails to ensure that all required forms and payments are actually received by the subscription agent prior to the expiration date. If you fail to complete and sign the required subscription forms, send an incorrect payment amount, or otherwise fail to follow the subscription procedures that apply to your desired transaction the subscription agent may, depending on the circumstances, reject your subscription or accept it to the extent of the payment received. Neither we nor our subscription agent will undertake to contact you concerning, or attempt to correct, an incomplete or incorrect subscription form or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures. You will not receive interest on subscription funds, including any funds ultimately returned to you. You will not earn any interest on your subscription funds while they are being held by the subscription agent pending the closing of this rights offering. In addition, if we cancel the rights offering, limit the exercise of your rights in order to protect against an unexpected ownership change for federal income tax purposes, or if you exercise your oversubscription privilege and are not allocated all of the shares of common stock for which you over-subscribe, neither we nor the subscription agent will have any obligation with respect to the subscription rights except to return, without interest, any subscription payments to you. By participating in this offering and executing a subscription certificate, you are making binding and enforceable representations to the Company We have protection mechanics in place to preserve our ability to utilize our NOLs against future taxable income, if any, which could be substantially reduced if we were to undergo an ownership change within the meaning of Section 382 of the Internal Revenue Code. Each shareholder who exercises their rights is required to agree to the application of the protection mechanics solely relating to their exercise of rights in the offering. By signing the subscription certificate and exercising their rights, each shareholder agrees, solely with respect to their exercise of rights in the offering, that: the following protection mechanics are valid, binding and enforceable against such shareholder and each shareholder will either make the representation set forth in the first bullet point below or, in the alternative, follow the procedures set forth in the second, third and fourth bullet points below: by purchasing shares of common stock, each subscriber will represent to us that they will not be, after giving effect to its basic and/or oversubscription rights, an owner, either direct or indirect, record or beneficial, or by application of Section 382 attribution provisions summarized above, of more than 1,100,000 shares of our common stock; if an exercise of basic and/or oversubscription rights would result in the subscriber owning more than 1,100,000 shares of our common stock, the subscriber must notify the subscription agent at the telephone number set forth under the heading Subscription Agent; if requested, each subscriber will be required to provide us with additional information regarding the amount of common stock that the subscriber owns; we have the right to instruct the subscription agent to reduce the amount of an oversubscription exercise by the minimum amount necessary to preserve our NOLs and capital loss carryforwards against future taxable income; any purported exercise of rights in violation of the protection mechanics section will be void and of no force and effect; and we have the right to void and cancel (and treat as if never exercised) any exercise of rights, and shares issued pursuant to an exercise of rights, if any of the agreements, representations or warranties of a subscriber in the subscription documents are false. With respect to our discretion to instruct the subscription agent to refuse to honor any exercise of rights by 5% shareholders or a subscriber s exercise to the extent an exercise might, in our sole and absolute discretion, result in the subscriber owning 5% or more of our common stock, we will only reduce the amount of an oversubscription exercise by the minimum amount necessary to preserve our NOLs and capital loss carryforwards against future taxable income. Additionally, we will honor the exercise of rights in this offering by Steel Partners Holdings L.P., currently a beneficial holder of 30% of the outstanding shares of our common stock, in an amount that does not endanger our NOLs and capital loss carryforwards against future taxable income. Table of Contents Shareholders who do not sign the subscription certificate or make the foregoing representations shall not be permitted to exercise rights in the offering and will not be subject to the protection mechanics with respect to the offering. See The Rights Offering Protection Mechanics. You may not receive all of the shares you subscribe for pursuant to oversubscription rights If an insufficient number of shares is available to fully satisfy all oversubscription right requests, the available shares will be distributed proportionately among shareholders who exercised their oversubscription rights based on the number of shares each shareholder subscribed for under their basic subscription rights. Also, we have protection mechanics in place to preserve our ability to utilize our NOLs, including the ability to limit the amount of shares that certain shareholders may over-subscribe for, provided however, the protection mechanics will not prevent any shareholder from being able to exercise their basic subscription rights. Shareholders who currently own more than, or who would increase their current holdings of our common stock from fewer than 1,100,000 shares to greater than 1,100,000 shares by virtue of the exercise of their basic and/or oversubscription rights in this offering, may not be able to over-subscribe to the extent otherwise allowable. We will only permit such shareholders to participate in this offering up to such amounts as will not jeopardize our NOLs and capital loss carryforwards. We will only reduce the amount of an oversubscription exercise by the minimum amount necessary to preserve our NOLs and capital loss carryforwards against future taxable income. See The Rights Offering Protection Mechanics.

parsed_sections/risk_factors/2010/CIK0000090310_gambit_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ Table of Contents Changes in Control There are no arrangements known to the Company, the operation of which may at a subsequent time result in the change of control of the Company. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Transactions Except for the transactions described below, none of our directors, executive officers or more-than-five-percent shareholders, nor any associate, affiliate, or family member of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, since the start of the fiscal year ending August 31, 2009, which has materially affected or will materially affect us. Other than as set forth above, none of our directors, executive officers or more-than-five-percent shareholders, nor any associate, affiliate, or family member of the foregoing, has entered into any agreement with the Company in which any of them is to receive from the Company or provide to the Company anything of value. TRANSFER AGENT AND REGISTRAR We utilize the services of Columbia Stock Transfer Company, 601 East Seltice Way, Suite 202, Post Falls, Idaho 83854, as our transfer agent and registrar. LEGAL MATTERS The validity of our common stock offered by this prospectus has been passed upon by Gregory B. Lipsker, PLLC,, W. 601 Main Ave., Suite 1017, Spokane, WA 99201 by opinion dated April 20, 2010.

parsed_sections/risk_factors/2010/CIK0000216039_grubb_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock and 12% Preferred Stock will be subject to risks, including risks inherent in our business. The value of your investment may decline and could result in a loss. You should carefully consider the following factors as well as other information contained in this prospectus before deciding to invest in our common stock or 12% Preferred Stock. Additional risks and uncertainties not presently known to us, or not identified below, may also materially adversely affect our business, liquidity, financial condition and results of operations. Risks Related to our Equity Securities The 12% Preferred Stock will rank senior to our common stock but junior to all of our liabilities and our subsidiaries liabilities, in the event of a bankruptcy, liquidation or winding-up. In the event of bankruptcy, liquidation or winding-up, our assets will be available to pay obligations on the 12% Preferred Stock only after all of our liabilities have been paid, but prior to any payments are made with respect to our common stock. In addition, the 12% Preferred Stock effectively ranks junior to all existing and future liabilities of our subsidiaries. The rights of holders of the 12% Preferred Stock to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the prior claims of that subsidiary s creditors. In the event of bankruptcy, liquidation or winding-up, there may not be sufficient assets remaining, after paying our liabilities, and our subsidiaries liabilities, to pay amounts due on any or all of the 12% Preferred Stock then outstanding. Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the case of the 12% Preferred Stock, (1) dividends are payable only if and when declared by our Board of Directors or a duly authorized committee of the Board, and (2) as a Delaware corporation, we are restricted to making dividend payments and redemption payments only out of legally available assets. Further, the 12% Preferred Stock places no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions except that a consent of holders representing at least a majority of the 12% Preferred Stock is required to amend our certificate of incorporation as to the terms of the 12% Preferred Stock or to issue additional 12% Preferred Stock that ranks senior to or, to the extent that 225,000 shares of the 12% Preferred Stock remain outstanding, on a parity with, the 12% Preferred Stock. The market price of the 12% Preferred Stock will be directly affected by the market price of our common stock, which may be volatile. To the extent that a secondary market for the 12% Preferred Stock develops, we believe that the market price of the 12% Preferred Stock will be significantly affected by the market price of our common stock. We cannot predict how the shares of our common stock will trade in the future. This may result in greater volatility in the market price of the 12% Preferred Stock than would be expected for non-convertible stock. From the beginning of the year ended December 31, 2006 to March 19, 2010, the reported high and low sales prices for our common stock ranged from a low of $0.25 to a high of $14.50 per share. The market price of our common stock will likely fluctuate in response to a number of factors, including, without limitation, the following: our liquidity risk management, including our ratings, if any, our liquidity plan and potential transactions designed to enhance liquidity; actual or anticipated quarterly fluctuations in our operating and financial results; developments related to investigations, proceedings, or litigation that involves us; changes in financial estimates and recommendations by financial analysts; dispositions, acquisitions, and financings; additional issuances by us of common stock; additional issuances by us of other series or classes of preferred stock; actions of our common shareowners, including sales of common stock by shareowners and our directors and executive officers; changes in funding markets, including commercial paper, term debt, bank deposits and the asset-backed securitization markets; changes in confidence in real estate markets and real estate investments; fluctuations in the stock price and operating results of our competitors and real estate-related stocks in general; government reactions to current economic and market conditions; and regional, national and global political and economic conditions and other factors. The market price of our common stock may also be affected by market conditions affecting the stock markets in general and/or real estate stocks in particular, including price and trading fluctuations on the New York Stock Exchange ( NYSE ). These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock, and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market prices of our common stock and, in turn, the 12% Preferred Stock. In addition, we expect that the market price of the 12% Preferred Stock will be influenced by yield and interest rates in the capital markets, our creditworthiness, and the occurrence of events affecting us that do not require an adjustment to the conversion rate. There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock or the 12% Preferred Stock and may negatively impact the holders investment. We are not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any substantially similar securities. In addition, with the applicable consent of holders of the 12% Preferred Stock, we may issue additional preferred stock that ranks senior to, or on a parity with, the 12% Preferred Stock. The market price of our common stock or 12% Preferred Stock could decline as a result of sales of a large number of shares of common stock or 12% Preferred Stock or similar securities in the market after this offering or the perception that such sales could occur. For example, if we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected. In addition, each share of 12% Preferred Stock is convertible at the option of the holder thereof into shares of our common stock. The conversion of some or all of the 12% Preferred Stock will dilute the ownership interest of our existing common shareowners. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of the outstanding shares of our common stock and the 12% Preferred Stock. In addition, the existence of our 12% Preferred Stock may encourage short selling or arbitrage trading activity by market participants because the conversion of our 12% Preferred Stock could depress the price of our equity securities. As noted above, a decline in the market price of the common stock may negatively impact the market price for the 12% Preferred Stock. An active trading market for the 12% Preferred Stock does not exist and may not develop. The 12% Preferred Stock has no established trading market and is not listed on any securities exchange. Since the securities have no stated maturity date, investors seeking liquidity will be limited to selling their shares of 12% Preferred Stock in the secondary market or converting their shares of 12% Preferred Stock into shares of common stock and subsequently seeking to sell those shares of common stock. See Risk Factors If our common stock is delisted, your ability to transfer or sell your shares of the 12% Preferred Stock, or common stock upon conversion, may be limited and the market value of the 12% Preferred Stock will be adversely affected. We cannot assure you that an active trading market in the 12% Preferred Stock will develop or, even if it develops, we cannot assure you that it will last. In either case the trading price of the 12% Preferred Stock could be adversely affected and the holders ability to transfer shares of 12% Preferred Stock will be limited. We were advised by the initial purchaser in the offering of the 12% Preferred Stock that it intends to make a market in the shares of our 12% Preferred Stock; however, it is not obligated to do so and may discontinue market-making at any time without notice. We cannot assure you that another firm or person will make a market in the 12% Preferred Stock. The 12% Preferred Stock has not been rated. The 12% Preferred Stock has not been rated by any nationally recognized statistical rating organization. This factor may affect the trading price of the 12% Preferred Stock. Holders of the 12% Preferred Stock do not have identical rights as holders of common stock until they acquire the common stock, but will be subject to all changes made with respect to our common stock. Except for voting and dividend rights, holders of the 12% Preferred Stock have no rights with respect to the common stock until conversion of their 12% Preferred Stock, including rights to respond to tender offers, but your investment in the 12% Preferred Stock may be negatively affected by such events. See Description of 12% Preferred Stock Voting Rights. Even though the holders of the 12% Preferred Stock vote on an as-converted basis with holders of the common stock, upon conversion of the 12% Preferred Stock, holders will be entitled to exercise the rights of a holder of common stock only as to matters for which the record date occurs on or after the applicable conversion date and only to the extent permitted by law, although holders will be subject to any changes in the powers, preferences, or special rights of common stock that may occur as a result of any shareowner action taken before the applicable conversion date. Certain actions, including amendment of our certificate of incorporation, require the additional approval of a majority of holders of the common stock voting as a separate class (excluding shares of common stock issuable upon conversion of the 12% Preferred Stock). The 12% Preferred Stock is perpetual in nature. The shares of 12% Preferred Stock represent a perpetual interest in us and, unlike indebtedness, will not give rise to a claim for payment of a principal amount at a particular date. Holders have no right to call for the redemption of the 12% Preferred Stock. Therefore, holders should be aware that they may be required to bear the financial risks of an investment in the 12% Preferred Stock for an indefinite period of time. We are obligated to pay quarterly dividends with respect to our Preferred Stock. We are obligated to pay quarterly dividends with respect to the 12% Preferred Stock and in the event such dividends are in arrears for six or more quarters, whether or not consecutive, subject to certain limitations, holders representing a majority of shares of Preferred Stock (voting together as a class with the holders of all other classes or series of preferred stock upon which like voting rights have been conferred and are exercisable) will be entitled to nominate and vote for the election of two additional directors to serve on our Board of Directors (the Preferred Stock Directors ), until all unpaid dividends with respect to the Preferred Stock and any other class or series of preferred stock upon which like voting rights have been conferred and are exercisable have been paid or declared and a sum sufficient for payment is set aside for such payment; provided that the election of any such Preferred Stock Directors will not cause us to violate the corporate governance requirements of the NYSE (or any other exchange or automated quotation system on which our securities may be listed or quoted) that requires listed or quoted companies to have a majority of independent directors; and provided further that the Board of Directors will, at no time, include more than two Preferred Stock Directors. The conversion rate of the 12% Preferred Stock may not be adjusted for all dilutive events that may adversely affect the market price of the 12% Preferred Stock or the common stock issuable upon conversion of the 12% Preferred Stock. The number of shares of our common stock that holders are entitled to receive upon conversion of a share of 12% Preferred Stock is subject to adjustment for certain events arising from increases in dividends or distributions in common stock, subdivisions, splits, and combinations of the common stock, certain issuances of stock and stock purchase rights, debt, or asset distributions, cash distributions, self-tender offers and exchange offers, and certain other actions by us that modify our capital structure. See Description of 12% Preferred Stock Conversion Rights Conversion Rate Adjustment General. We will not adjust the conversion rate for other events, including our issuances of common stock in connection with acquisitions or the exercise of options or restricted stock awards granted pursuant to equity plans approved by the Board, or, after the six-month anniversary of November 6, 2009, for cash. There can be no assurance that an event that adversely affects the value of the 12% Preferred Stock, but does not result in an adjustment to the conversion rate, will not occur. Further, if any of these other events adversely affects the market price of our common stock, it may also adversely affect the market price of the 12% Preferred Stock. In addition, we are not restricted from offering common stock in the future or engaging in other transactions that may dilute our common stock and we may issue additional shares of 12% Preferred Stock, which may dilute our common stock. A change in control with respect to us may not constitute a merger, consolidation or sale of assets or a fundamental change for the purpose of the 12% Preferred Stock. The 12% Preferred Stock contains no covenants or other provisions to afford protection to holders in the event of certain mergers, consolidations or sales of assets with respect to us constituting a change in control on or after November 15, 2019 except upon the occurrence of certain mergers, consolidations or sales of assets. See Description of 12% Preferred Stock Conversion Rights Conversion Rate Adjustment Merger, Consolidation or Sale of Assets, Description of 12% Preferred Stock Repurchase of Option of Holders Upon a Fundamental Change and Description of 12% Preferred Stock Adjustment to Conversion Rate Upon Certain Change of Control Events. Furthermore, the limited covenants with respect to a fundamental change or change in control may not include every change in control event that could cause the market price of the 12% Preferred Stock to decline. The adjustment to conversion rate described under Description of 12% Preferred Stock Adjustment to Conversion Rate upon Certain Change in Control Events will not be applicable on or after November 15, 2014 and the repurchase right of preferred holders described under Repurchase at Option of Holders Upon a Fundamental Change will not be applicable on or after November 15, 2019, and these limitations may have the effect of discouraging third parties from pursuing a change in control of our company, which may otherwise be in the best interest of our shareowners. Any change in control with respect to us either before or after November 15, 2019 may negatively affect the liquidity, value or volatility of our common stock, and thus, negatively impact the value of the 12% Preferred Stock. We may not have the funds necessary to repurchase the 12% Preferred Stock following a fundamental change. Holders of the notes have the right to require us to repurchase the 12% Preferred Stock in cash upon the occurrence of a fundamental change prior to November 15, 2019. We may not have sufficient funds to repurchase the 12% Preferred Stock at such time, and may not have the ability to arrange necessary financing on acceptable terms. In addition, our ability to purchase the 12% Preferred Stock may be limited by law or the terms of other agreements outstanding at such time. Moreover, a failure to repurchase the 12% Preferred Stock may also constitute an event of default, and result in the acceleration of the maturity of, any then existing indebtedness, under any indenture, credit agreement or other agreement outstanding at that time, which could further restrict our ability to make such payments. The adjustment to conversion rate in respect of conversions following certain change in control events may not adequately compensate you. If certain change in control events occur prior to November 15, 2014, and a holder converts in connection with such change in control, we will, under certain circumstances, pay a adjustment to conversion rate in respect of any conversions of the 12% Preferred Stock that occur during the period beginning on the date notice of such fundamental change is delivered and ending on the change in control conversion date. See Description of 12% Preferred Stock Adjustment to Conversion Rate upon Certain Change in Control Events. Although the adjustment to the conversion rate is designed to compensate holders for the lost option value of the holders 12% Preferred Stock, it is only an approximation of such lost value and may not adequately compensate the holders for their actual loss. Our obligation to adjust the conversion rate in respect of conversions following certain changes in control may be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness, as applied to such payments. If our common stock is delisted, your ability to transfer or sell the 12% Preferred Stock, or common stock upon conversion, may be limited and the market value of the 12% Preferred Stock will be adversely affected. The 12% Preferred Stock does not contain protective provisions in the event that our common stock is delisted. Since the 12% Preferred Stock has no stated maturity date, holders may be forced to elect between converting their shares of the 12% Preferred Stock into illiquid shares of our common stock or holding their shares of the 12% Preferred Stock and receiving stated dividends on the stock when, as and if authorized by our Board of Directors and declared by us with no assurance as to ever receiving the liquidation preference of the 12% Preferred Stock. Accordingly, if our common stock is delisted, the holders ability to transfer or sell their shares of the 12% Preferred Stock, or common stock upon conversion, may be limited, and the market value of the 12% Preferred Stock will be adversely affected. Holders of the 12% Preferred Stock may be unable to use the dividends-received deduction. Distributions paid to corporate U.S. holders (as defined herein) of the 12% Preferred Stock (or our common stock) may be eligible for the dividends-received deduction to the extent we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As of December 31, 2009, we had an accumulated deficit of $412.1 million and we had a net loss of $78.8 million in the year ended December 31, 2009. There can be no assurance that we will have sufficient current or accumulated earnings and profits during future fiscal years for the distributions on the 12% Preferred Stock (or our common stock) to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction. Instead, distributions would be treated first as a tax-free return of capital to the extent of a U.S. holder s adjusted tax basis in the 12% Preferred Stock and thereafter as capital gain. If a corporate U.S. holder s tax basis in the 12% Preferred Stock (or our common stock) were reduced in this manner, then the amount of gain, if any, recognized by such holder on a subsequent disposition of such stock would be increased and such holder would not be eligible for a dividends-received deduction to offset such gain. Holders may have to pay U.S. federal income tax if we adjust, or fail to adjust, the conversion rate of the 12% Preferred Stock in certain circumstances, even if holders do not receive a corresponding distribution of cash. Holders may be treated as having received a constructive distribution from us as a result of certain adjustments to (or certain failures to make adjustments to) the conversion rate or other terms of the 12% Preferred Stock. The tax treatment of any constructive distributions is not entirely clear. It is possible that such distribution could be treated as a taxable dividend for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits, even though holders do not receive any cash with respect to such constructive distribution. In addition, non-U.S. holders (as defined in Certain U.S. Federal Income Tax Considerations ) of the 12% Preferred Stock may, in certain circumstances, be subject to U.S. federal withholding tax on any constructive distributions on the 12% Preferred Stock that are treated as taxable dividends, and we intend to withhold U.S. federal income tax with respect to any such constructive taxable dividends from any payments made by us to such non-U.S. holders. You are advised to consult your independent tax advisor and read Certain U.S. Federal Income Tax Considerations regarding the U.S. federal income tax consequences of an adjustment to the conversion rate of the 12% Preferred Stock and the issuance of the 12% Preferred Stock at less than the liquidation preference amount. Risks Related to the Company s Business in General The ongoing downturn in the general economy and the real estate market has negatively impacted and could continue to negatively impact our business and financial results. Periods of economic slowdown or recession, significantly reduced access to credit, declining employment levels, decreasing demand for real estate, declining real estate values or the perception that any of these events may occur, can reduce transaction volumes or demand for services for each of our business lines. The current recession and the downturn in the real estate market have resulted in and may continue to result in: a decline in acquisition, disposition and leasing activity; a decline in the supply of capital invested in commercial real estate; a decline in fees collected from investment management programs, which are dependent upon demand for investment in commercial real estate; and a decline in the value of real estate and in rental rates, which would cause us to realize lower revenue from: property management fees, which in certain cases are calculated as a percentage of the revenue of the property under management; and commissions or fees derived from property valuation, sales and leasing, which are typically based on the value, sale price or lease revenue commitment, respectively. The declining real estate market in the United States, the availability and cost of credit, increased unemployment, volatile oil prices, declining consumer confidence and the instability of United States banking and financial institutions, have contributed to increased volatility, an overall economic slowdown and diminished expectations for the economy and markets going forward. The fragile state of the credit markets, the fear of a global recession for an extended period and the current economic environment have impacted real estate services and investment management firms like ours through reduced transaction volumes, falling transaction values, lower real estate valuations, liquidity restrictions, market volatility, and the loss of confidence. As a consequence, similar to other real estate services and investment management firms, our stock price has declined significantly. Due the economic downturn, it may take us longer to dispose of real estate assets and investments and the selling prices may be lower than originally anticipated. If this occurs, fees from transaction services will be reduced. In addition, the performance of certain properties in the investment management portfolio may be negatively impacted, which would likewise affect our fees. As a result, the carrying value of certain of our real estate investments may become impaired and we could record losses as a result of such impairment or we could experience reduced profitability related to declines in real estate values. Pursuant to the requirements of the Property, Plant, and Equipment Topic, we assess the value of our assets and real estate investments. This valuation review resulted in us recognizing an impairment charge of approximately $24.0 million against the carrying value of the properties and real estate investments during the year ended December 31, 2009. We are not able to predict the severity or duration of the current adverse economic environment or the disruption in the financial markets. The real estate market tends to be cyclical and related to the condition of the overall economy and to the perceptions of investors, developers and other market participants as to the economic outlook. The ongoing downturn in the general economy and the real estate market has negatively impacted and could continue to negatively impact our business and results of operations. The ongoing adverse developments in the credit markets and the risk of continued market deterioration have adversely affected our revenues, expenses and operating results and may continue to do so. Our segments are sensitive to credit cost and availability as well as market place liquidity. In addition, the revenues in all our businesses are dependent to some extent on overall volume of activity and pricing in the commercial real estate market. In 2008 and 2009, the credit markets experienced an unprecedented level of disruption and uncertainty. This disruption and uncertainty has reduced the availability and significantly increased the cost of most sources of funding. In certain cases, sources of funding have been eliminated. Disruptions in the credit markets have adversely affected, and may continue to adversely affect, our business of providing services to owners, purchasers, sellers, investors and occupants of real estate in connection with acquisitions, dispositions and leasing of real property. If our clients are unable to obtain credit on favorable terms, there will be fewer completed acquisitions, dispositions and leases of property. In addition, if purchasers of real estate are not able to obtain favorable financing resulting in a lack of disposition opportunities for funds for whom we act as advisor, our fee revenues will decline and we may also experience losses on real estate held for investment. The recent decline in real estate values and the inability to obtain financing has either eliminated or severely reduced the availability of our historical funding sources for our investment management programs, and to the extent credit remains available for these programs, it is currently more expensive. We may not be able to continue to access sources of funding for our investment management programs or, if available to us, we may not be able to do so on favorable terms. Any decision by lenders to make additional funds available to us in the future for our investment management programs will depend upon a number of factors, such as industry and market trends in our business, the lenders own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or lending opportunities. The depth and duration of the current credit market and liquidity disruptions are impossible to predict. In fact, the magnitude of the recent credit market disruption has exceeded the expectations of most if not all market participants. This uncertainty limits our ability to develop future business plans and we believe that it limits the ability of other participants in the credit markets and the real estate markets to do so as well. This uncertainty may lead market participants to act more conservatively than in recent history, which may continue to depress demand and pricing in our markets. We experienced additional, unanticipated costs and may have additional risk and further costs as a result of the restatement of our financial statements. As a result of the restatement in 2009 of certain audited and unaudited financial data, and the special investigation in connection therewith, we incurred substantial, additional unanticipated costs for accounting and legal fees. The restatement and special investigation was also time-consuming and affected management s attention and resources. Further, there are no assurances that we will not become involved in legal proceedings in the future in relation to these restatements. In connection with any such potential proceedings, any incurred expenses not covered by available insurance or any adverse resolution could have a material adverse effect on the Company. Any such future legal proceedings could also be time-consuming and distract our management from the conduct of our business. Our ability to access credit and capital markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in financial markets and general economic downturns. There can be no assurances that our anticipated cash flow from operations will be sufficient to meet all of our cash requirements. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges. We have historically relied upon access to the credit markets from time to time as a source of liquidity for the portion of our working capital requirements not provided by cash from operations. We used a significant portion of the net proceeds from the sale of the 12% Preferred Stock to pay off and terminate our Credit Facility and have not secured a new credit facility or line or credit with which to borrow funds. Market disruptions such as those currently being experienced in the United States and other countries may increase our cost of borrowing or adversely affect our ability to access sources of capital. These disruptions include turmoil in the financial services and real estate industries, including substantial uncertainty surrounding particular lending institutions, and general economic downturns. If we are unable to access credit at competitive rates or at all, or if our short-term or long-term borrowing costs dramatically increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected. We have received a notice from the NYSE that we did not meet our continued listing requirements. If we are unable to rectify this non-compliance in accordance with NYSE rules, our common stock will be delisted from trading on the NYSE, which could have a material adverse effect on the liquidity and value of our common stock. On August 11, 2009, we received notification from NYSE Regulation, Inc. that we were not in compliance with the NYSE s continued listing standard requiring that we maintain an average market capitalization and shareowners equity of not less than $50 million. In connection with the NYSE s rules, we submitted a business plan to the NYSE on November 3, 2009 evidencing how the Company intends to come into compliance with the continued listing standards and on November 9, 2009, we were advised that the NYSE s Listing and Compliance Committee has accepted the Company s business plan. Accordingly, we need to have an average market capitalization over a consecutive 30 trading day period of $50 million or total shareowners equity of $50 million by April 11, 2011 although we may come into compliance sooner, or based on two consecutive quarterly monitoring periods, which is an ongoing process. The NYSE conducts quarterly reviews during the 18-month period from August 11, 2009 through February 11, 2011. If we are unable to regain compliance with the NYSE s continued listing standard within the required time frame, our common stock will be delisted from the NYSE. As a result, we likely would have our common stock quoted on the Over-the-Counter Bulletin Board ( OTC BB ) in order to have our common stock continue to be traded on a public market. Securities that trade on the OTC BB generally have less liquidity and greater volatility than securities that trade on the NYSE. Delisting from the NYSE also may preclude us from using certain state securities law exemptions, which could make it more difficult and expensive for us to raise capital in the future and more difficult for us to provide compensation packages sufficient to attract and retain top talent. In addition, because issuers whose securities trade on the OTC BB are not subject to the corporate governance and other standards imposed by the NYSE, and such issuers receive less news and analyst coverage, our reputation may suffer, which could result in a decrease in the trading price of our shares. The delisting of our common stock from the NYSE, therefore, could significantly disrupt the ability of investors to trade our common stock and could have a material adverse effect on the value and liquidity of our common stock. The TIC business in general, from which we have historically generated significant revenues, materially contracted in 2009. We have historically generated significant revenues from fees earned through the transaction structuring and property management of our TIC programs. In 2009, however, with the nationwide decline in real estate values and the global credit crisis, the TIC industry contracted significantly. According to data from OMNI Research Consulting, approximately $3.7 billion of TIC equity was raised in 2006. In 2009, the amount of TIC equity raised declined by approximately 94% to $228.7 million. As we have historically generated a significant amount of revenue from our TIC operations, the rapid and steep decline in this industry may have a material, adverse effect on our business and results of operations if it is unable to generate revenues in our other business segments, of which there can be no assurances, to make up for the loss of TIC-related revenues. We do not anticipate the TIC market to recover in the near term. The decline in value of many of the properties purchased by TIC and real estate fund investors in our sponsored programs as a result of the downturn in the real estate market, and the potential loss of investor equity in these programs, may negatively affect our reputation and ability to sell future sponsored programs. The declining real estate market has resulted in declining values for many of the properties purchased by investors in our sponsored TIC and real estate fund programs. In addition, the lack of available credit has negatively impacted the ability to refinance these properties at loan maturity. As a consequence, the TIC and fund program investors may be forced to dispose of their properties at selling prices lower than the original purchase price. In addition, some properties may be valued at less than the outstanding loan amount and may be subject to default and foreclosure by the lender. Sales of these real estate assets at less than original purchase price, loan defaults or foreclosures will result in the loss of investor equity. Losses by investors may negatively affect the reputation of our investment management business and our ability to sell current or future sponsored programs and earn fees. Any decrease in our fees could have a material adverse effect on our business, results of operations and financial condition. We are in a highly competitive business with numerous competitors, some of which may have greater financial and operational resources than we do. We compete in a variety of service disciplines within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as on a regional and local level. We face competition not only from other national real estate service providers, but also from global real estate service providers, boutique real estate advisory firms, consulting and appraisal firms. Depending on the product or service, we also face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms, some of which may have greater financial resources than we do. We are also subject to competition from other large national firms and from multi-national firms that have similar service competencies to us. Although many of our competitors are local or regional firms that are substantially smaller than us, some of our competitors are substantially larger than us on a local, regional, national or international basis. In general, there can be no assurance that we will be able to continue to compete effectively with respect to any of our business lines or on an overall basis, or to maintain current fee levels or margins, or maintain or increase our market share. As a service-oriented company, we depend upon the retention of senior management and key personnel, and the loss of our current personnel or our failure to hire and retain additional personnel could harm our business. Our success is dependent upon our ability to retain our executive officers and other key employees and to attract and retain highly skilled personnel. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to identify, recruit, hire, train, retain and motivate highly skilled executive, managerial, sales, marketing and customer service personnel. Competition for these personnel is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. We use equity incentives to attract and retain our key personnel. In 2009, our stock price declined significantly, resulting in the decline in value of previously provided equity awards, which may result in an increase risk of loss of key personnel. The performance of our stock may also diminish our ability to offer attractive incentive awards to new hires. Our failure to recruit and retain necessary executive, managerial, sales, marketing and customer service personnel could harm our business and our ability to obtain new customers. We may expand our business to include international operations so that we may be more competitive, but in doing so it could subject us to social, political and economic risks of doing business in foreign countries. Although we do not currently conduct significant business outside the United States, we are considering an expansion of our international operations so that we may be more competitive. Currently, our lack of international capabilities sometimes places us at a competitive disadvantage when prospective clients are seeing one real estate services provider that can service their needs both in the United States and overseas. There can be no assurances that we will be able to successfully expand our business in international markets. Current global economic conditions may restrict, limit or delay our ability to expand our business into international markets or make such expansion less economically feasible. If we expand into international markets, circumstances and developments related to international operations that could negatively affect our business or results of operations include, but are not limited to, the following factors: lack of substantial experience operating in international markets; lack of recognition of the Grubb Ellis brand name in international markets; difficulties and costs of staffing and managing international operations; currency restrictions, which may prevent the transfer of capital and profits to the United States; diverse foreign currency fluctuations; changes in regulatory requirements; potentially adverse tax consequences; the responsibility of complying with multiple and potentially conflicting laws; the impact of regional or country-specific business cycles and economic instability; the geographic, time zone, language and cultural differences among personnel in different areas of the world; political instability; and foreign ownership restrictions with respect to operations in certain countries. Additionally, we may establish joint ventures with foreign entities for the provision of brokerage services abroad, which may involve the purchase or sale of our equity securities or the equity securities of the joint venture participant(s). In these joint ventures, we may not have the right or power to direct the management and policies of the joint venture and other participants may take action contrary to our instructions or requests and against our policies and objectives. In addition, the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with ours. If a joint venture participant acts contrary to our interest, then it could have a material adverse effect on our business and results of operations. Failure to manage any future growth effectively may have a material adverse effect on our financial condition and results of operations. We will need to successfully manage any future growth effectively. The integration and additional growth may place a significant strain upon management, administrative, operational and financial infrastructure. Our ability to grow also depends upon our ability to successfully hire, train, supervise and manage additional executive officers and new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. Additionally, managing future growth may be difficult due to the new geographic locations and business lines of the Company. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we integrate and continue to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage the future growth effectively could have a material adverse effect on our business, financial condition and results of operations. Risks Related to the Company s Transaction Services and Management Services Business Our quarterly operating results are likely to fluctuate due to the seasonal nature of our business and may fail to meet expectations, which may cause the price of our securities to decline. Historically, the majority of our revenue has been derived from the transaction services that it provides. Such services are typically subject to seasonal fluctuations. We typically experience the lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by calendar year-end. However, our non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. As a result, since a high proportion of these operating expenses are fixed, declines in revenue could disproportionately affect our operating results in a quarter. In addition, our quarterly operating results have fluctuated in the past and will likely continue to fluctuate in the future. If our quarterly operating results fail to meet expectations, the price of our securities could fluctuate or decline significantly. If the properties that we manage fail to perform, then our business and results of operations could be harmed. Our success partially depends upon the performance of the properties we manage. We could be adversely affected by the nonperformance of, or the deteriorating financial condition of, certain of our clients. The revenue we generate from our property management business is generally a percentage of aggregate rent collections from the properties. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control: our ability to attract and retain creditworthy tenants; the magnitude of defaults by tenants under their respective leases; our ability to control operating expenses; governmental regulations, local rent control or stabilization ordinances which are in, or may be put into, effect; various uninsurable risks; financial condition of certain clients; financial conditions prevailing generally and in the areas in which these properties are located; the nature and extent of competitive properties; and the general real estate market. These or other factors may negatively impact the properties that we manage, which could have a material adverse effect on our business and results of operations. If we fail to comply with laws and regulations applicable to real estate brokerage and mortgage transactions and other business lines, then we may incur significant financial penalties. Due to the broad geographic scope of our operations and the real estate services performed, we are subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each state in which it operates. If we fail to maintain our licenses or conduct brokerage activities without a license or violate any of the regulations applicable to our licenses, then we may be required to pay fines (including treble damages in certain states) or return commissions received or have our licenses suspended or revoked. In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous state licensing regimes and the possible loss resulting from non-compliance have increased. Furthermore, the laws and regulations applicable to our business, both in the United States and in foreign countries, also may change in ways that increase the costs of compliance. The failure to comply with both foreign and domestic regulations could result in significant financial penalties which could have a material adverse effect on our business and results of operations. We may have liabilities in connection with real estate brokerage and property and facilities management activities. As a licensed real estate broker, we and our licensed employees and independent contractors that work for us are subject to statutory due diligence, disclosure and standard-of-care obligations. Failure to fulfill these obligations could subject us or our employees to litigation from parties who purchased, sold or leased properties that we or they brokered or managed. We could become subject to claims by participants in real estate sales, as well as building owners and companies for whom we provide management services, claiming that we did not fulfill our statutory obligations as a broker. In addition, in our property and facilities management businesses, we hire and supervise third-party contractors to provide construction and engineering services for our managed properties. While our role is limited to that of a supervisor, we may be subject to claims for construction defects or other similar actions. Adverse outcomes of property and facilities management litigation could have a material adverse effect on our business, financial condition and results of operations. Environmental regulations may adversely impact our business and/or cause us to incur costs for cleanup of hazardous substances or wastes or other environmental liabilities. Federal, state and local laws and regulations impose various environmental zoning restrictions, use controls, and disclosure obligations which impact the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities, as well as mortgage lending availability, with respect to some properties. A decrease or delay in such transactions may adversely affect the results of operations and financial condition of our real estate brokerage business. In addition, a failure by us to disclose environmental concerns in connection with a real estate transaction may subject it to liability to a buyer or lessee of property. In addition, in our role as a property manager, we could incur liability under environmental laws for the investigation or remediation of hazardous or toxic substances or wastes at properties we currently or formerly managed, or at off-site locations where wastes from such properties were disposed. Such liability can be imposed without regard for the lawfulness of the original disposal activity, or our knowledge of, or fault for, the release or contamination. Further, liability under some of these laws may be joint and several, meaning that one liable party could be held responsible for all costs related to a contaminated site. We could also be held liable for property damage or personal injury claims alleged to result from environmental contamination, or from asbestos-containing materials or lead-based paint present at the properties we manage. Insurance for such matters may not be available or sufficient. Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase the our cost of legal compliance and potentially subject us to violations or claims. Although such costs have not had a material impact on our financial results or competitive position during fiscal year 2007, 2008 or 2009, the enactment of additional regulations, or more stringent enforcement of existing regulations, could cause us to incur significant costs in the future, and/or adversely impact our brokerage and management services businesses. Risks Related to the Company s Investment Management and Broker-Dealer Business Declines in asset value, reductions in distributions in investment programs or loss of properties to foreclosure could adversely affect our business, as it could cause harm to our reputation, cause the loss of management contracts and third-party broker-dealer selling agreements, limit our ability to sign future third-party broker-dealer selling agreements and potentially expose us to legal liability. The current market value of many of the properties owned through our investment programs have decreased as a result of the overall decline in the economy and commercial real estate markets. In addition, there have been reductions in distributions in numerous investment programs in 2008 and 2009, in many instances to a zero percent distribution rate. Significant declines in value and reductions in distributions in the investment programs sponsored by us could adversely affect our reputation and our ability to attract investors for future investment programs. In addition, significant declines in value and reductions in distributions could cause us to lose asset and property management contracts for our investment management programs, cause us to lose third-party broker-dealer selling agreements for existing investment programs, including our REITs, and limit our ability to sign future third-party broker-dealer agreements. The loss of value may be significant enough to cause certain investment programs to go into foreclosure or result in a complete loss of equity for program investors. Significant losses in asset value and investor equity and reductions in distributions increases the risk of claims or legal actions by program investors. Any such legal liability could result in further damage to our reputation, loss of third-party broker-dealer selling agreements and incurrence of legal expenses which could have a material adverse effect on our business, results of operations and financial condition. We currently provide our Investment Management services primarily to our investment programs. Our revenue depends on the number of our programs, on the price of the properties acquired or disposed, and on the revenue generated by the properties under our management. We derive fees for Investment Management services based on a percentage of the price of the properties acquired or disposed of by our programs and for management services based on a percentage of the rental amounts of the properties in our programs. We are responsible for the management of all of the properties owned by our programs, but as of December 31, 2009 we had subcontracted the property management of approximately 11.0% of our programs office, medical office and healthcare related facilities and retail properties (based on square footage) and 16.3% of our programs multi-family apartment units to third parties. For REITs, investment decisions are controlled by the Board of Directors of REITs that are independent of us. Investment decisions of these Boards affect the fees we earn. As a result, if any of our programs are unsuccessful, our Investment Management services fees will be reduced, if any are paid at all. In addition, failure of our programs to provide competitive investment returns could significantly impair our ability to market future programs. Our inability to spread risk among a large number of programs could cause us to be over-reliant on a limited number of programs for our revenues. There can be no assurance that we will maintain current levels of transaction and management services for our programs properties. We may be required to repay loans we guaranteed that were used to finance properties acquired by our programs. From time to time we or our investment management subsidiaries provided guarantees of loans for properties under management. As of December 31, 2009, there were 146 properties under management with loan guarantees of approximately $3.6 billion in total principal outstanding with terms ranging from 1 to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8 billion as of December 31, 2009. Our guarantees consisted of non-recourse/carve-out guarantees of debt of properties under management, non-recourse/carve-out guarantees of our debt, recourse guarantees of debt of properties under management and recourse guarantees of our debt. A non-recourse/carve-out guarantee imposes personal liability on the guarantor in the event the borrower engages in certain acts prohibited by the loan documents. Each non-recourse carve-out guarantee is an individual document entered into with the mortgage lender in connection with the purchase or refinance of an individual property. While there is not a standard document evidencing these guarantees, liability under the non-recourse carve-out guarantees generally may be triggered by, among other things, any or all of the following: a voluntary bankruptcy or similar insolvency proceeding of any borrower; a transfer of the property or any interest therein in violation of the loan documents; a violation by any borrower of the special purpose entity requirements set forth in the loan documents; any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan; the gross negligence or willful misconduct by any borrower in connection with the property, the loan or any obligation under the loan documents; the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or other funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the property, and (iii) any awards or other amounts received in connection with the condemnation of all or a portion of the property; any waste of the property caused by acts or omissions of borrower of the removal or disposal of any portion of the property after an event of default under the loan documents; and the breach of any obligations set forth in an environmental or hazardous substances indemnification agreement from borrower. Certain violations (typically the first three listed above) render the entire debt balance recourse to the guarantor regardless of the actual damage incurred by lender, while the liability for other violations is limited to the damages incurred by the lender. Notice and cure provisions vary between guarantees. Generally the guarantor irrevocably and unconditionally guarantees to the lender the payment and performance of the guaranteed obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration or maturity or otherwise, and the guarantor covenants and agrees that it is liable for the guaranteed obligations as a primary obligor. As of December 31, 2009, to the best of our knowledge, there is no amount of debt owed by us as a result of the borrowers engaging in prohibited acts. In addition, the consolidated variable interest entities ( VIEs ) and unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to the interests in our TIC investments totaling $277.0 million and $154.8 million as of December 31, 2009, respectively. As property values and performance decline, the risk of exposure under these guarantees increases. We initially evaluate these guarantees to determine if the guarantee meets the criteria required to record a liability in accordance with the Guarantees Topic. As of December 31, 2009 and 2008, we had recourse guarantees of $33.9 million and $42.4 million, respectively, relating to debt of properties under management. As of December 31, 2009, approximately $9.8 million of these recourse guarantees relate to debt that has matured or is not currently in compliance with certain loan covenants. In evaluating the potential liability relating to such guarantees, we consider factors such as the value of the properties secured by the debt, the likelihood that the lender will call the guarantee in light of the current debt service and other factors. As of December 31, 2009 and 2008, we recorded a liability of $3.8 million and $9.1 million, respectively, related to our estimate of probable loss related to recourse guarantees of debt of properties under management which matured in January and April 2009. Our evaluation of the potential liability may prove to be inaccurate and liabilities may exceed estimates. In the event that actual losses materially exceed estimates, individual investment management subsidiaries may not be able to pay such obligations as they become due. Failure of any investment management subsidiary to pay our debts as they become due would likely have a materially negative impact on the ongoing business of the Company, and the investment management operations in particular. We may be unable to grow our investment programs, which would cause us to fail to satisfy our business strategy. A significant element of our business strategy is the growth in the size and number of our investment programs. The success of each investment program will depend on raising adequate capital for the investment, identifying appropriate assets for acquisition and effectively and efficiently closing the transactions. There can be no assurance that we will be able to identify and invest in additional properties or will be able to raise adequate capital to grow or launch new programs in the future. If we are unable to grow our existing vehicles or consummate new programs in the future, growth of the revenue we receive from transaction and management services may be negatively affected. The revenue streams from our management services for sponsored programs are subject to limitation or cancellation. The agreements under which we provide advisory and management services to public non-traded REITs we have sponsored may generally be terminated by each REIT s independent Board of Directors following a notice period, with or without cause. We cannot assure you that these agreements will not be terminated. Grubb Ellis Healthcare REIT, Inc. (now Healthcare Trust of America, Inc. as of August 31, 2009) did not renew its Advisory Agreement with our subsidiary upon the termination of the Advisory Agreement on September 20, 2009 and, as a result, our asset and property management fees have been reduced. The management agreements under which we provide property management services to our sponsored TIC programs may generally be terminated by a single TIC investor with cause upon 30 days notice or without cause annually upon renewal. Appointment of a new property manager requires unanimous agreement of the TIC investors and, generally, the approval of the lender. We have received termination notices on approximately one-third of our managed TIC properties resulting in the termination of one property management agreement during 2009. Although we are disputing these terminations, it is not likely that we will be able to retain all of the management contracts for these properties. Loss of a significant number of contracts and fees could have a material adverse effect on our business, results of operations and financial condition. The inability to access investors for our programs through broker-dealers or other intermediaries could have a material adverse effect on our business. Our ability to source capital for our programs depends significantly on access to the client base of securities broker-dealers and other financial investment intermediaries that may offer competing investment products. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to continue to maintain these relationships as well as finding additional securities broker-dealers to facilitate offerings by our programs or to find investors for our REITs, TIC programs and other investment programs. We cannot be sure that we will continue to gain access to these channels. In addition, competition for capital is intense and we may not be able to obtain the capital required to complete a program. The inability to have this access could have a material adverse effect on our business and results of operations. The termination of any of our broker-dealer relationships, especially given the limited number of key broker-dealers, could have a material adverse effect on our business. Our securities programs are sold through third-party broker-dealers who are members of our selling group. While we have established relationships with our selling group, we are required to enter into a new agreement with each member of the selling group for each new program we offers. In addition, our programs may be removed from a selling broker-dealer s approved program list at any time for any reason. We cannot assure you of the continued participation of existing members of our selling group nor can we make an assurance that our selling group will expand. While we continue to diversify and add new investment channels for our programs, a significant portion of the growth in recent years in the number of TIC programs we sponsor and in our REITs has been as a result of capital raised by a relatively limited number of broker-dealers. Loss of any of these key broker-dealer relationships, or the failure to develop new relationships to cover our expanding business through new investment channels, could have a material adverse effect on our business and results of operations. Misconduct by third-party selling broker-dealers or our sales force, could have a material adverse effect on our business. We rely on selling broker-dealers and our sales force to properly offer our securities programs to customers in compliance with our selling agreements and with applicable regulatory requirements. While these persons are responsible for their activities as registered broker-dealers, their actions may nonetheless result in complaints or legal or regulatory action against us. A significant amount of our programs are structured to provide favorable tax treatment to investors or REITs. If a program fails to satisfy the requirements necessary to permit this favorable tax treatment, we could be subject to claims by investors and our reputation for structuring these transactions would be negatively affected, which would have an adverse effect on our financial condition and results of operations. We structure TIC programs and public non-traded REITs to provide favorable tax treatment to investors. For example, our TIC investors are able to defer the recognition of gain on sale of investment or business property if they enter into a 1031 exchange. Similarly, qualified REITs generally are not subject to federal income tax at corporate rates, which permits REITs to make larger distributions to investors (i.e. without reduction for federal income tax imposed at the corporate level). If we fail to properly structure a TIC transaction or if a REIT fails to satisfy the complex requirements for qualification and taxation as a REIT under the Internal Revenue Code, we could be subject to claims by investors as a result of additional tax they may be required to pay or because they are unable to receive the distributions they expected at the time they made their investment. In addition, any failure to satisfy applicable tax regulations in structuring our programs would negatively affect our reputation, which would in turn affect our ability to earn additional fees from new programs. Claims by investors could lead to losses and any reduction in our fees would have a material adverse effect on our revenues. Any future co-investment activities we undertake could subject us to real estate investment risks which could lead to the need for substantial capital contributions, which may impact our cash flows and financial condition and, if we are unable to make them, could damage our reputation and result in adverse consequences to our holdings. We may from time to time invest our capital in certain real estate investments with other real estate firms or with institutional investors such as pension plans. Any co-investment will generally require us to make initial capital contributions, and some co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets. These contributions could adversely impact our cash flows and financial condition. Moreover, the failure to provide these contributions could have adverse consequences to our interests in these investments. These adverse consequences could include damage to our reputation with our co-investment partners as well as dilution of ownership and the necessity of obtaining alternative funding from other sources that may be on disadvantageous terms, if available at all. Geographic concentration of program properties may expose our programs to regional economic downturns that could adversely impact their operations and, as a result, the fees we are able to generate from them, including fees on disposition of the properties as we may be limited in our ability to dispose of properties in a challenging real estate market. Our programs generally focus on acquiring assets satisfying particular investment criteria, such as type or quality of tenants. There is generally no or little focus on the geographic location of a particular property. We cannot guarantee, however, that our programs will have, or will be able to maintain, a significant amount of geographic diversity. Although our property programs are located in 29 states, a majority of these properties (by square footage) are located in Texas, Georgia, California, Florida and North Carolina. Geographic concentration of properties exposes our programs to economic downturns in the areas where the properties are located. A regional recession or other major, localized economic disruption in a region, such as earthquakes and hurricanes, in any of these areas could adversely affect our programs ability to generate or increase their operating revenues, attract new tenants or dispose of unproductive properties. Any reduction in program revenues would effectively reduce the fees we generate from them, which would adversely affect our results of operations and financial condition. If third-party managers providing property management services for our programs office, medical office and healthcare related facilities, retail and multi-family properties are negligent in their performance of, or default on, their management obligations, the tenants may not renew their leases or we may become subject to unforeseen liabilities. If this occurs, it could have an adverse effect on our financial condition and operating results. We have entered into agreements with third-party management companies to provide property management services for a significant number of our programs properties, and we expect to enter into similar third-party management agreements with respect to properties our programs acquire in the future. We do not supervise these third-party managers and their personnel on a day-to-day basis and we cannot assure you that they will manage our programs properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that these managers will not otherwise default on their management obligations to us. If any of the foregoing occurs, the relationships with our programs tenants could be damaged, which may cause the tenants not to renew their leases, and we could incur liabilities resulting from loss or injury to the properties or to persons at the properties. If we are unable to lease the properties or we become subject to significant liabilities as a result of third-party management performance issues, our operating results and financial condition could be substantially harmed. We or our new programs may be required to incur future indebtedness to raise sufficient funds to purchase properties. One of our business strategies is to develop new investment programs. The development of a new program requires the identification and subsequent acquisition of properties when the opportunity arises. In some instances, in order to effectively and efficiently complete a program, we may provide deposits for the acquisition of the property or actually purchase the property and warehouse it temporarily for the program. If we do not have cash on hand available to pay these deposits or fund an acquisition, we or our programs may be required to incur additional indebtedness, which indebtedness may not be available on acceptable terms. If we incur substantial debt, we could lose our interests in any properties that have been provided as collateral for any secured borrowing, or we could lose our assets if the debt is recourse to it. In addition, our cash flow from operations may not be sufficient to repay these obligations upon their maturity, making it necessary for us to raise additional capital or dispose of some of our assets. We cannot assure you that we will be able to borrow additional debt on satisfactory terms, or at all. Future pressures to lower, waive or credit back our fees could reduce our revenue and profitability. We have on occasion waived or credited our fees for real estate acquisitions, financings, dispositions and management fees for our TIC programs to improve projected investment returns and attract TIC investors. There has also been a trend toward lower fees in some segments of the third-party asset management business, and fees paid for the management of properties in our TIC programs or public non-traded REITs could follow these trends. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. We cannot assure you that we will be able to maintain our current fee structures. Fee reductions on existing or future new business could have a material adverse impact on our revenue and profitability. Regulatory uncertainties related to our broker-dealer services could harm our business. The securities industry in the United States is subject to extensive regulation under both federal and state laws. Broker-dealers are subject to regulations covering all aspects of the securities business. The SEC, FINRA, and other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer or any of our officers or employees. The ability to comply with applicable laws and rules is largely dependent on an internal system to ensure compliance, as well as the ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance with these securities regulations, which could have a material adverse effect on our operations and profitability. We depend upon our programs tenants to pay rent, and their inability to pay rent may substantially reduce certain fees we receive which are based on gross rental amounts. Our programs are subject to varying degrees of risk that generally arise from the ownership of real estate. For example, the income we are able to generate from management fees is derived from the gross rental income on the properties in our programs. The rental income depends upon the ability of the tenants of our programs properties to generate enough income to make their lease payments. Changes beyond our control may adversely affect the tenants ability to make lease payments or could require them to terminate their leases. Either an inability to make lease payments or a termination of one or more leases could reduce the management fees we receive. These changes include, among others, the following: downturns in national or regional economic conditions where our programs properties are located, which generally will negatively impact the demand and rental rates; changes in local market conditions such as an oversupply of properties, including space available by sublease or new construction, or a reduction in demand for properties in our programs, making it more difficult for our programs to lease space at attractive rental rates or at all; competition from other available properties, which could cause our programs to lose current or prospective tenants or cause them to reduce rental rates; and changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. Due to these changes, among others, tenants and lease guarantors, if any, may be unable to make their lease payments. Defaults by tenants or the failure of any lease guarantors to fulfill their obligations, or other early termination of a lease could, depending upon the size of the leased premises and our ability as property manager to successfully find a substitute tenant, have a material adverse effect on our revenue. Conflicts of interest inherent in transactions between our programs and us, and among our programs, could create liability for us that could have a material adverse effect on our results of operations and financial condition. These conflicts include but are not limited to the following: we experience conflicts of interests with certain of our directors, officers and affiliates from time to time with regard to any of our investments, transactions and agreements in which we hold a direct or indirect pecuniary interest; since we receive both management fees and acquisition and disposition fees for our programs properties, we could be in conflict with our programs over whether their properties should be sold or held by the program and we may make decisions or take actions based on factors other than in the best interest of investors of a particular sponsored investor program; a component of the compensation of certain of our executives is based on particular programs, which could cause the executives to favor those programs over others; we may face conflicts of interests as to how we allocate property acquisition opportunities or prospective tenants among competing programs; we may face conflicts of interests if programs sell properties to each other or invest in each other; and our executive officers will devote only as much of their time to a program as they determine is reasonably required, which may be substantially less than full time; during times of intense activity in other programs, these officers may devote less time and fewer resources to a program than are necessary or appropriate to manage the program s business. We cannot assure you that one or more of these conflicts will not result in claims by investors in our programs, which could have a material adverse effect on our results of operations and financial condition. The offerings conducted to raise capital for our TIC programs are done in reliance on exemptions from the registration requirements of the Securities Act. A failure to satisfy the requirements for the appropriate exemption could void the offering or, if it is already completed, provide the investors with rescission rights, either of which would have a material adverse effect on our reputation and as a result our business and results of operations. The securities of our TIC programs are offered and sold in reliance upon a private placement offering exemption from registration under the Securities Act and applicable state securities laws. If we or our dealer-manager failed to comply with the requirements of the relevant exemption and an offering were in process, we may have to terminate the offering. If an offering was completed, the investors may have the right, if they so desired, to rescind their purchase of the securities. A rescission offer could also be required under applicable state securities laws and regulations in states where any securities were offered without registration or qualification pursuant to a private offering or other exemption. If a number of holders sought rescission at one time, the applicable program would be required to make significant payments which could adversely affect our business and as a result, the fees generated by us from such program. If one of our programs was forced to terminate an offering before it was completed or to make a rescission offer, our reputation would also likely be significantly harmed. Any reduction in fees as a result of a rescission offer or a loss of reputation would have a material adverse effect on our business and results of operations. The inability to identify suitable refinance options may negatively impact investment program performance and cause harm to our reputation, cause the loss of management contracts and third-party broker-dealer selling agreements, limit our ability to sign future third-party broker-dealer selling agreements and potentially expose us to legal liability. The availability of real estate financing has greatly diminished over the past year as a result of the global credit crisis and overall decline in the real estate market. As a result, we may not be able to refinance some or all of the loans maturing in our investment management portfolio. Failure to obtain suitable refinance options may have a negative impact on investment returns and may potentially cause investments to go into foreclosure or result in a complete loss of equity for program investors. Any such negative impact on distributions, foreclosure or loss of equity in an investment program could adversely affect our reputation and our ability to attract investors for future investment programs. In addition, it could cause us to lose asset and property management contracts, cause us to lose third-party broker-dealer selling agreements for existing investment programs, including our REITs, and limit our ability to sign future third-party broker-dealer agreements. Significant losses in investor equity and reductions in distributions increase the risk of claims or legal actions by program investors. Any such legal liability could result in damage to our reputation, loss of third-party broker-dealer selling agreements and incurrence of legal expenses. An increase in interest rates may negatively affect the equity value of our programs or cause us to lose potential investors to alternative investments, causing the fees we receive for transaction and management services to be reduced. Although in the last two years, interest rates in the United States have generally decreased, if interest rates were to rise, our financing costs would likely rise and our net yield to investors may decline. This downward pressure on net yields to investors in our programs could compare poorly to rising yields on alternative investments. Additionally, as interest rates rise, valuations of commercial real estate properties typically decline. A decrease in both the attractiveness of our programs and the value of assets held by these programs could cause a decrease in both transaction and management services revenues, which would have an adverse effect on our results of operations. Increasing competition for the acquisition of real estate may impede our ability to make future acquisitions which would reduce the fees we generate from these programs and could adversely affect our operating results and financial condition. The commercial real estate industry is highly competitive on an international, national and regional level. Our programs face competition from REITs, institutional pension plans, and other public and private real estate companies and private real estate investors for the acquisition of properties and for raising capital to create programs to make these acquisitions. Competition may prevent the Company s programs from acquiring desirable properties or increase the price they must pay for real estate. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If our programs pay higher prices for properties, investors may experience a lower return on investment and be less inclined to invest in our next program which may decrease our profitability. Increased competition for properties may also preclude our programs from acquiring properties that would generate the most attractive returns to investors or may reduce the number of properties our programs could acquire, which could have an adverse effect on our business. Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our programs properties and harm our financial condition. Because real estate investments are relatively illiquid, our ability to promptly facilitate a sale of one or more properties or investments in our programs in response to changing economic, financial and investment conditions may be limited. In particular, these risks could arise from weakness in the market for a property, changes in the financial condition or prospects of prospective purchasers, changes in regional, national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located. Fees from the disposition of properties would be materially affected if we were unable to facilitate a significant number of property dispositions for our programs. Risks Related to the Company in General Delaware law and provisions of our amended and restated certificate of incorporation and restated bylaws contain provisions that could delay, deter or prevent a change of control. The anti-takeover provisions of Delaware law impose various impediments on the ability or desire of a third party to acquire control of the Company, even if a change of control would be beneficial to our existing shareowners, and we will be subject to these Delaware anti-takeover provisions. Additionally, our amended and restated certificate of incorporation and our restated bylaws contain provisions that might enable our management to resist a proposed takeover of the Company. The provisions include: the authority of our board to issue, without shareowner approval, preferred stock with such terms as our board may determine; the authority of our board to adopt, amend or repeal our bylaws; and a prohibition on holders of less than a majority of our outstanding shares of capital stock calling a special meeting of our shareowners. These provisions could discourage, delay or prevent a change of control of the Company or an acquisition of the Company at a price that our shareowners may find attractive. These provisions also may discourage proxy contests and make it more difficult for our shareowners to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. We have the ability to issue blank check preferred stock, which could adversely affect the voting power and other rights of the holders of our common stock. The Board of Directors has the right to issue blank check preferred stock, which may affect the voting rights of holders of common stock and could deter or delay an attempt to obtain control of the Company. There are currently nineteen million authorized and undesignated shares of preferred stock that could be so issued. Our Board of Directors is authorized, without any further shareowner approval, to issue one or more additional series of preferred stock in addition to the currently outstanding 12% Preferred Stock. We are authorized to fix and state the voting rights, powers, designations, preferences and relative participation or other special rights of each such series of preferred stock and any qualifications, limitations and restrictions thereon. Preferred stock typically ranks prior to the common stock with respect to dividend rights, liquidation preferences, or both, and may have full, limited, or expanded voting rights. Accordingly, issuances of preferred stock could adversely affect the voting power and other rights of the holders of common stock and could negatively affect the market price of our common stock. We have registration rights outstanding, which could have a negative impact on our share price if exercised. In addition to the registration rights granted to one of the institutional purchasers of the 12% Preferred Stock, which has been exercised, pursuant to the Company s registration rights agreement with Kojaian Ventures, L.L.C. and Kojaian Holdings, LLC, the holders of such rights could, in the future, cause the Company to file additional registration statements with respect to certain of our shares of common stock, which could have a negative impact on the market price of the Company s common stock. Future sales of our common stock could adversely affect our stock price. There are an aggregate of 469,746 Company shares as of December 31, 2009 subject to issuance upon the exercise of outstanding options. Accordingly, these shares will be available for sale in the open market, subject to vesting restrictions, and, in the case of affiliates, certain volume limitations. The sale of shares either pursuant to the exercise of outstanding options or as after the satisfaction of vesting restriction of certain restricted stock could also cause the price of our common stock to decline. Uninsured and underinsured losses may adversely affect operations. Should a property sustain damage or an occupant sustain an injury, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. In the event of a substantial property loss or personal injury, the insurance coverage may not be sufficient to pay the full damages. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under these circumstances, the insurance proceeds we receive, if any, might not be adequate to restore our economic position with respect to the property. In the event of a significant loss at one or more of the properties in our programs, the remaining insurance under the applicable policy, if any, could be insufficient to adequately insure the remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than the current policy. A loss at any of these properties or an increase in premium as a result of a loss could decrease the income from or value of properties under management in our programs, which in turn would reduce the fees we receive from these programs. Any decrease or loss in fees could have a material adverse effect on our financial condition or results of operations. We carry commercial general liability, fire and extended coverage insurance with respect to our programs properties. We obtain coverage that has policy specifications and insured limits that we believe are customarily carried for similar properties. We cannot assure you, however, that particular risks that are currently insurable will continue to be insurable on an economic basis or that current levels of coverage will continue to be available. In addition, we generally do not obtain insurance against certain risks, such as floods.

parsed_sections/risk_factors/2010/CIK0000357264_pacific_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained or incorporated by reference into this prospectus, including the information contained in the section entitled Risk Factors in our 2009 Form 10-K, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, and any risks described in our other filings with the SEC, pursuant to Section 13(a), 13(c), 14, or 15(d) of the Exchange Act before making a decision to invest in our common stock. The risks described below and in the documents referred to in the preceding sentence are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to the Rights Offering The subscription price determined for the rights offering is not an indication of the value of our common stock. The $0.20 per share subscription price was established by our Board of Directors and is the same implied price per share of common stock paid by the Investor for the common stock and Series C Preferred Stock purchased in the Investment. The subscription price is not necessarily related to our book value, results of operations, cash flows, financial condition or the future market value of our common stock. We cannot assure you that the trading price of our common stock will not decline during or after the rights offering. We also cannot assure you that you will be able to sell shares purchased in the rights offering at a price equal to or greater than the subscription price. We do not intend to change the subscription price in response to changes in the trading price of our common stock prior to the closing of the rights offering. Because we do not have any formal commitments from any of our shareholders to participate in the rights offering and because no minimum subscription is required, we cannot assure you of the amount of proceeds, if any, that we will receive from the rights offering. We do not have any formal commitments from any of our shareholders to participate in the rights offering and there is no minimum subscription required. We cannot assure you that any of our shareholders will exercise all or any part of their subscription rights. Therefore, we cannot assure you of the amount of proceeds that we will receive in the rights offering. If our shareholders subscribe for fewer shares of our common stock than anticipated, the net proceeds we receive from the rights offering could be reduced and we could incur damage to our reputation. The rights offering may cause the price of our common stock to decline. Depending upon the trading price of our common stock at the time of our announcement of the rights offering and the terms of the rights offering, including the subscription price, together with the number of shares of common stock we could issue if the rights offering is completed, the rights offering may result in a decrease in the trading price of our common stock. This decrease may continue after the completion of the rights offering. If that occurs, your purchase of shares of our common stock in the rights offering may be at a price greater than the prevailing trading price. Because you may not revoke or change your exercise of the subscription rights unless we are required by law to permit revocation, you could be committed to buying shares above the prevailing trading price at the time the rights offering is completed even if you later learn information about us that you consider unfavorable. Once you exercise your subscription rights, you may not revoke or change the exercise unless we are required by law to permit revocation. The trading price of our common stock may decline before the subscription rights expire. If you exercise your subscription rights, and, afterwards, the trading price of our common stock decreases below the $0.20 per share subscription price, you will have committed to buying shares of our common stock at a price above the prevailing trading price and could have an immediate unrealized loss. In addition, if you exercise your subscription rights and later learn information about us that you consider unfavorable, you will be committed to buying shares and may not revoke or change your exercise. However, notwithstanding any election forms received from participants (and other account holders) in the 401(k) Plan regarding the exercise of their subscription rights with respect to shares of common stock held through the 401(k) Plan, no subscription rights will be exercised with respect to shares held through the 401(k) Plan if the per share public trading price of our common stock is not greater than $0.20 on the 4th business day prior to the expiration date ([ ], 2010). For additional information, see The Rights Offering Special Instructions for Participants in Our 401(k) Plan. Our common stock is traded on NASDAQ under the symbol PCBC, and the closing sale price of our common stock on NASDAQ on [ ], 2010 was $[ ] per share. There can be no assurances that the trading price of our common stock will equal or exceed the subscription price at the time of exercise or at the expiration of the subscription rights offering period. You may not be able to resell any shares of our common stock that you purchase pursuant to the exercise of subscription rights immediately upon expiration of the subscription rights offering period or be able to sell your shares at a price equal to or greater than the subscription price. If you exercise your subscription rights, you may not be able to resell the common stock purchased by exercising your subscription rights until your account has been credited with those shares. Moreover, you will have no rights as a shareholder of the shares you purchased in the rights offering until we issue the shares to you. Although we will endeavor to issue the shares as soon as practicable after completion of the rights offering, including the guaranteed delivery period and after all necessary calculations have been completed, there may be a delay between the expiration date of the rights offering and the time that the shares are issued. In addition, we cannot assure you that, following the exercise of your subscription rights, you will be able to sell your common stock at a price equal to or greater than the subscription price. If you do not exercise your subscription rights, you will suffer dilution. If you do not exercise your subscription rights or you exercise less than all of your subscription rights, and other shareholders fully exercise their subscription rights or exercise a greater proportion of their subscription rights than you exercise, you will suffer dilution of your percentage ownership of our equity securities relative to such other shareholders. As of the record date, there were 47,406,297 shares of common stock outstanding. As of [ ], 2010, which is following the conversion of all of the shares of Series C Preferred Stock and Series D Preferred Stock into shares of common stock, there were [ ] shares of our common stock outstanding. If all of our shareholders exercise their subscription rights in full, we will issue 726,975,565 shares of common stock in the rights offering. Based on the number of shares of common stock outstanding as of [ ], 2010, if we issue all 726,975,565 shares of common stock available in the rights offering, we would have [ ] shares of common stock outstanding following the completion of the rights offering. We may cancel the rights offering at any time prior to the expiration of the rights offering period, and neither we nor the subscription agent will have any obligation to you except to return your subscription payment, without interest or penalty. We may at our sole discretion cancel the rights offering at any time prior to the expiration of the rights offering period. If we elect to cancel the rights offering, neither we nor the subscription agent will have any obligation with respect to the subscription rights except to return to you, without interest or penalty, as soon as practicable any subscription payments. If you do not act promptly and follow the subscription instructions, your exercise of subscription rights will be rejected. Shareholders who desire to purchase shares in the rights offering must act promptly to ensure that all required forms and payments are actually received by the subscription agent, and all payments clear, prior to the expiration date of the rights offering. If you are a beneficial owner of shares, you must act promptly to ensure that your broker, dealer, custodian bank or other nominee acts for you and that all required forms and payments are actually received by the subscription agent prior to the expiration of the rights offering period. We are not responsible if your broker, dealer, custodian bank or nominee fails to ensure that all required forms and payments are actually received by the subscription agent, and all payments clear, prior to the expiration of the rights offering period. If you fail to complete and sign the required subscription forms, send an incorrect payment amount or otherwise fail to follow the subscription procedures that apply to your exercise in the rights offering or your payment does not clear prior to the expiration of the rights offering period, the subscription agent may, depending on the circumstances, reject your subscription or accept it only to the extent of any payment that has been received and has cleared. Neither we nor the subscription agent will undertake to contact you concerning, or attempt to correct, an incomplete or incorrect subscription form. We have the sole discretion to determine whether the exercise of your subscription rights properly and timely follows the subscription procedures. If you are a participant (or other account holder) in our 401(k) Plan, you may exercise your subscription rights with respect to those shares of common stock that you held through the 401(k) Plan as of the record date by properly completing the special election form, called the 401(k) Plan Participant Election Form, that is provided to you by the subscription agent, BNY Mellon Shareowner Services. You must return your completed 401(k) Plan Participant Election Form to the subscription agent in the manner prescribed in the materials provided to you by the subscription agent. Your 401(k) Plan Participant Election Form must be received by the subscription agent by the close of business on the 4th business day prior to the expiration of the rights offering ([ ], 2010). If your 401(k) Plan Participant Election Form is not received by such special deadline, your election to exercise your subscription rights with respect to shares of our common stock that you hold through the 401(k) Plan will not be effective. See The Rights Offering Special Instructions for Participants in Our 401(k) Plan. If you fail to complete the 401(k) Plan Participant Election Form correctly, you may be unable to participate in the rights offering. Neither we, the subscription agent, the information agent, the 401(k) Plan trustee nor anyone else will be under any duty to notify you of any defect or irregularity in connection with your submission of the 401(k) Plan Participant Election Form and we will not be liable for failure to notify you of any defect or irregularity. Also note that, notwithstanding any election that you make regarding the exercise of your subscription rights with respect to shares of common stock held through the 401(k) Plan, your subscription rights will not be exercised with respect to shares held through the 401(k) Plan if the per share public trading price of our common stock is not greater than $0.20 on the 4th business day prior to the expiration date ([ ], 2010). For additional information, see The Rights Offering Special Instructions for Participants in Our 401(k) Plan. If you make payment of the subscription price by uncertified personal check, your check may not clear in sufficient time to enable you to purchase shares in the rights offering. Any uncertified personal check used to pay the subscription price in the rights offering must clear prior to the expiration date of the rights offering, and the clearing process may require five or more business days. As a result, if you choose to use an uncertified personal check to pay the subscription price, it may not clear prior to the expiration date, in which event you would not be eligible to exercise your subscription rights. You may eliminate this risk by paying the subscription price by certified or cashier s check or bank draft drawn on a U.S. bank or by a U.S. postal or express money order. The subscription rights are non-transferable and thus there will be no market for them. The subscription rights may not be sold, transferred or assigned to anyone else and will not be traded or quoted on NASDAQ or any other stock exchange or trading market. Because the subscription rights are non-transferable, there is no market or other means for you to directly realize any value associated with the subscription rights. Our 401(k) Plan, which is receiving subscription rights, is not permitted to acquire, hold or dispose of subscription rights absent an exemption from the DOL. The 401(k) Plan is receiving subscription rights with respect to the shares of common stock held by the 401(k) Plan on behalf of the participants (and other account holders) even though 401(k) plans and other plans subject to ERISA, such as ours, are not permitted under ERISA or Section 4975 of the Code to acquire, hold or dispose of subscription rights absent an exemption from the DOL. We are submitting a request to the DOL that an exemption be granted on a retroactive basis, effective to the commencement of the rights offering, with respect to the acquisition, holding and exercise of the subscription rights by 401(k) Plan and its participants (and other account holders); however, the DOL may deny our pending exemption application. If our exemption request is denied by the DOL, the DOL may require us to take appropriate remedial action and could impose certain taxes and penalties on us. Our management will have broad discretion over the use of the net proceeds from the rights offering, and we may not invest the proceeds successfully. We intend to use the net proceeds from the rights offering for general corporate purposes, including an investment in the Bank. Accordingly, you will be relying on the judgment of our management with regard to the use of the proceeds from the rights offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. It is possible that we may invest the proceeds in a way that does not yield a favorable, or any, return for us. Risks Relating to Ownership of Our Common Stock The Investor is a controlling shareholder and may make decisions with respect to fundamental corporate transactions that may be different from the decisions of other shareholders. Before accounting for any issuance of stock pursuant to the rights offering, the Investor owns approximately 86.0% of our outstanding common stock, and two members of our Board of Directors designated by the Investor were appointed to the Board as a condition to closing the Investment. Accordingly, the Investor has a controlling influence over the election of directors to our Board and over corporate policy, including decisions to enter into mergers or other extraordinary transactions. In pursuing its economic interests, the Investor may make decisions with respect to fundamental corporate transactions that may be different from the decisions of other shareholders. The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive. The trading price of our common stock may fluctuate significantly as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. Among the factors that could affect our stock price are: actual or anticipated quarterly fluctuations in our operating results and financial condition; changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to our common stock or those of other financial institutions; failure to meet analysts loan and deposit volume, revenue, asset quality or earnings expectations; speculation in the press or investment community generally or relating to our reputation or the financial services industry; actions by our current shareholders, including sales of common stock by existing shareholders and/or directors and executive officers; fluctuations in the stock price and operating results of our competitors; future sales of our equity or equity-related securities; proposed or adopted regulatory changes or developments; investigations, proceedings, or litigation that involve or affect us; the performance of the national and California economy and the real estate markets in California; or general market conditions and, in particular, developments related to market conditions for the financial services industry. We are a holding company and depend on our subsidiaries for dividends, distributions and other payments. Substantially all of our activities are conducted through the Bank, and, consequently, as the parent company of the Bank, the principal source of funds from which we service debt and pay our obligations and dividends is the receipt of dividends from the Bank. Pursuant to the Operating Agreement, the Bank may not pay a dividend or make a capital distribution to the Company until September 2, 2013. From and after September 2, 2013, the Bank may not pay a dividend or make a capital distribution to the Company without the prior written consent of the OCC. The Written Agreement also restricts the payment of dividends by the Company, as well as the taking of dividends or any other payment representing a reduction in capital from the Bank, without the prior approval of the FRB. We have suspended payment of cash dividends on our common stock and may not pay any cash dividends on our common stock for the foreseeable future. On June 22, 2009, we announced that we had suspended payment of cash dividends on our common stock and exercised our right to defer regularly scheduled interest payments on our outstanding junior subordinated debentures related to trust preferred securities. We may not pay any cash dividends on our common stock until we are current on interest payments on such subordinated debentures. Our common stock is equity and therefore is subordinate to our indebtedness and any preferred stock. Shares of our common stock are equity interests in the Company and do not constitute indebtedness. As such, shares of our common stock will rank junior to all indebtedness and other non-equity claims on the Company with respect to assets available to satisfy claims on the Company, including in a liquidation of the Company. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of any holders of our preferred stock then outstanding. There may be future sales or other dilution of our equity that may adversely affect the market price of our common stock. We are not restricted from issuing additional shares of our common stock or preferred stock. The issuance of any additional shares of common or preferred stock or convertible securities or the exercise of such securities could be substantially dilutive to holders of our common stock. The market value of our common stock could also decline as a result of sales by us of a large number of shares of common stock or any future class or series of stock in the market or the perception that such sales could occur. Resales of our common stock or other securities in the public market may cause the market price of our common stock to fall. In connection with the Investment, we provided the Investor with customary registration rights with respect to the acquired common stock and the shares of our common stock issued to the Investor upon the conversion of the Series C Preferred Stock. In addition, in connection with the Exchange, we provided Treasury with customary registration rights with respect to the shares of our common stock issued to Treasury upon the conversion of the Series D Preferred Stock. The market value of our common stock could decline as a result of sales by the Investor and/or Treasury of a substantial amount of the common stock held by each of them. Antitakeover provisions of our articles of incorporation and bylaws and federal and state law may limit the ability of another party to acquire us, which could cause our stock price to decline. Various provisions of our articles of incorporation and bylaws and certain other actions that we have taken could delay or prevent a third-party from acquiring control of us even if doing so might be beneficial to our shareholders. These include, among other things, the authorization to issue blank check preferred stock by action of our Board of Directors acting alone, thus without obtaining shareholder approval. The BHCA and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, either regulatory approval must be obtained or notice must be furnished to the appropriate regulatory agencies and not disapproved prior to any person or entity acquiring control of a national bank, such as the Bank. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing to pay in the future for our common stock. Our common stock is not insured and you could lose the value of your entire investment. An investment in shares of our common stock is not a deposit and is not insured against loss or guaranteed by the federal government or any other governmental agency. We expect to effect a reverse stock split in the near future. We expect to effect a reverse stock split in the near future for the primary purpose of increasing the market price of our common stock and making our common stock more attractive to a broader range of institutional and other investors. Reducing the number of outstanding shares of our common stock through the reverse stock split is intended, absent other factors, to increase the per share market price of our common stock. However, other factors, such as our financial results, market conditions and the market perception of our business and prospects, may adversely affect the market price of our common stock. As a result, there can be no assurance that the reverse stock split, if completed, would increase the per share market price of our common stock, that the per share market price of our common stock would not decrease in the future or that our common stock would be more attractive to a broader range of institutional and other investors. Additionally, we cannot assure shareholders that the per share market price of our common stock after the reverse stock split, if completed, would increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split. Accordingly, the total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split. The reverse stock split, if completed, would affect all holders of our common stock uniformly and would not affect any shareholder s percentage ownership interest in the Company, except that record holders of common stock otherwise entitled to a fractional share as a result of the reverse stock split would receive a cash payment in lieu of such fractional share. These cash payments will reduce the number of post-reverse stock split holders of our common stock to the extent there are currently shareholders who would otherwise receive less than one share of common stock after the reverse stock split. The reverse stock split, if completed, may also result in some shareholders owning odd lots of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots may be higher than the costs of transactions in round lots of even multiples of 100 shares. As a controlled company, we are exempt from certain NASDAQ corporate governance requirements. Our common stock is currently listed on NASDAQ. NASDAQ generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under the rules applicable to NASDAQ, if another company owns more than 50% of the voting power of a listed company, that company is considered a controlled company and is exempt from rules relating to independence of the board of directors and the compensation and nominating committees. We are a controlled company because the Investor beneficially owns more than 50% of our outstanding voting stock. Accordingly, we are exempt from certain corporate governance requirements and holders of our common stock may not have all the protections that these rules are intended to provide. Our common stock may be subject to regulations prescribed by the SEC relating to penny stock. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in those regulations) of less than $5.00 per share, subject to certain exceptions. If our common stock meets the definition of a penny stock, it will be subject to these regulations, which impose additional sales practice requirements on broker-dealers who sell these securities to persons other than established customers and accredited investors, which generally are institutions with assets in excess of $5.0 million and individuals with a net worth in excess of $1.0 million or annual income exceeding $0.2 million (individually) or $0.3 million (jointly with their spouse).

parsed_sections/risk_factors/2010/CIK0000702513_bank-of_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock involves certain risks. You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this prospectus, before making an investment decision. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline substantially, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us at this time or that we currently deem immaterial may also materially and adversely affect our business and operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risks Related to Our Business Our business is subject to various economic risks that could adversely impact our results of operations and financial condition. There was significant disruption and volatility in the financial and capital markets during 2008 and 2009. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the United States and international credit markets, including a significant and rapid deterioration in the mortgage lending and related real estate markets and valuation levels. Unemployment nationwide and in California has increased significantly through this economic downturn and is anticipated to increase or remain elevated for the foreseeable future. Continued declines in real estate values, high unemployment and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. We conduct banking operations principally in Northern California. As a result, our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in Northern California. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve in the near term, in which case we could continue to experience losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges. In addition, the State of California is currently experiencing significant budgetary and fiscal difficulties, which include terminating and furloughing state employees. The businesses operating in California and Sacramento in particular depend on these state employees for business, and reduced spending activity by these state employees could have a material impact on the success or failure of these businesses, some of which are current or potential future customers of the Bank. A further deterioration in economic conditions, particularly within our geographic region, could result in the following consequences, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations: Loan delinquencies may further increase causing additional increases in our provision and allowance for loan losses; Financial sector regulators may adopt more restrictive practices or interpretations of existing regulations, or adopt new regulations; Collateral for loans made by the Bank, especially real estate related, may continue to decline in value, which in turn could reduce a client s borrowing power, and reduce the value of assets and collateral associated with our loans held for investment; Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities and decreased demand for our products and services; and Table of Contents Performance of the underlying loans in the private label mortgage backed securities we hold may continue to deteriorate as the recession continues, potentially causing other-than-temporary impairment markdowns to our investment portfolio. Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition. As of December 31, 2009, our total nonperforming assets amounted to $15.6 million, including $2.9 million in other real estate owned, or 2.27% of our total assets, down from $23.1 million, or 2.98% of total assets a year earlier. We experienced $6.7 million in net charge-offs in 2009 compared to $6.3 million in 2008. Our provision for loan and lease losses was $9.5 million for the twelve months ended December 31, 2009 compared to $6.5 million for the twelve months ended December 31, 2008. Nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we may expect to continue to incur losses relating to an increase in nonperforming assets. We generally do not record interest income on nonperforming loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience future increases in nonperforming assets. We have a concentration risk in real estate related loans. As of December 31, 2009, approximately 77.14% of our loan portfolio was secured by real estate, the majority of which is commercial real estate. Of that amount, 9.90% of our total loan portfolio consisted of construction loans, 43.24% related to commercial real estate, 16.42% related to residential mortgage loans (including our ITIN loans) and 7.58% involved real estate related loans not classified in the preceding definitions. As a result of increased levels of commercial and consumer delinquencies and declining real estate values, we have experienced increasing levels of net charge-offs. A large percentage of our loan portfolio is secured by commercial real estate loans which generally carry larger loan balances and historically have involved a greater degree of financial and credit risks than residential first mortgage loans. These loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower, and therefore repayment of these loans is often dependent on the cash flow of the borrower which may be unpredictable. Continued increases in commercial and consumer delinquency levels or continued declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects. Monitoring and servicing our Individual Tax Identification Number ( ITIN ) residential mortgage loans could prove more costly and time consuming than previously modeled. In April 2009, we completed a loan swap transaction, whereby we exchanged, without recourse, $14.0 million in certain nonperforming assets measured at fair value and cash of approximately $67.0 million for a pool of performing ITIN loans with an estimated fair value of $80.7 million. These loans are residential mortgage loans made to United States residents without a social security number and are geographically dispersed throughout the United States. This is our first ITIN loan transaction, and as such, is serviced through a third party. Worsening economic conditions in the United States may cause us to suffer higher default rates on our ITIN loans and reduce the value of the assets that we hold as collateral. In addition, if we are forced to Table of Contents foreclose and service these ITIN properties ourselves, we may realize additional monitoring, servicing and appraisal costs due to the geographic dispersement of the portfolio which would adversely affect our noninterest expense. Future loan losses may exceed the loan loss allowance. We have established a reserve for possible losses expected in connection with loans in the credit portfolio. This allowance reflects estimates of the collectability of certain identified loans, as well as an overall risk assessment of total loans outstanding. The determination of the amount of loan loss allowance is subjective; although the method for determining the amount of the allowance uses criteria such as risk ratings and historical loss rates, these factors may not be adequate predictors of future loan performance, particularly in the current economic climate. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur. If the loan loss allowance proves to be inadequate, we will need to make additional provisions to the allowance, which is accounted for as charges to income, which would adversely impact results of operations and financial condition. Moreover, bank regulators frequently monitor banks loan loss allowances, and if regulators were to determine that the allowance was inadequate, they may require us to increase the allowance, which also would adversely impact results of operations and financial condition. Defaults may negatively impact us. A source of risk arises from the possibility that losses will be sustained if a significant number of borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, which management believes are appropriate to minimize risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the loan portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations. Interest rate fluctuations, which are out of our control, could harm profitability. Our income is highly dependent on interest rate differentials and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank s interest-earning assets such as loans and securities, and the interest rates paid on the Bank s interest-bearing liabilities such as deposits and borrowings). These rates are highly sensitive to many factors, which are beyond our control, including general economic conditions, inflation, recession and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Because of our preference for using variable rate pricing on the majority of our loan portfolio and non-interest bearing demand deposit accounts we are asset sensitive. As a result, we are generally adversely affected by declining interest rates. In addition, changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits. These changes also affect the rates received on loans and securities and paid on deposits, which could have a material adverse effect on our business, financial condition and results of operations. Changes in the fair value of our securities may reduce our shareholders equity and net income. At December 31, 2009, $80.1 million of our securities were classified as available-for-sale. At such date, the aggregate net unrealized gain on our available-for-sale securities, net of tax, was $658,000. We increase or decrease shareholders equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported shareholders equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the event there are credit loss related impairments, the credit loss component is recognized in earnings. Table of Contents Our available for sale equity holdings consist of shares of the Federal Home Loan Bank of San Francisco ( FHLB ). As of December 31, 2009, we held stock in the FHLB totaling $6.1 million. The stock is carried at cost and is subject to recoverability testing under applicable accounting standards. As of December 31, 2009, we did not recognize an impairment charge related to our FHLB stock holdings; however, future negative changes to the financial condition of the FHLB may require us to recognize an impairment charge with respect to such stock holdings. Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs. Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, repurchase agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include negative operating results, a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole, as evidenced by turmoil in the domestic and worldwide credit markets in recent years. The condition of other financial institutions could negatively affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, public perceptions and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations. Changes in laws, government regulation and monetary policy may have a material effect on our results of operations. Financial institutions have been the subject of substantial legislative and regulatory changes and may be the subject of further legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations may cause our results of operations to differ materially. In addition, the cost and burden of compliance with applicable laws and regulations have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for us, as well as for our borrowers, particularly as implemented by the Federal Reserve Board, primarily through open market operations in United States government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on us or our borrowers, and therefore on our results of operations. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 ( EESA ) was signed into law. Pursuant to the EESA, the Treasury was granted the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the United States financial markets and has proposed several programs, including the purchase by the Treasury of certain troubled assets from financial institutions and the direct purchase by the Treasury of equity of financial institutions. There can be no assurance, however, as to the actual impact that the foregoing or any other governmental program will have on the financial markets. The failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access Table of Contents to credit or the trading price of our common stock. In addition, current initiatives of President Obama s Administration and the possible enactment of recently proposed bankruptcy legislation may adversely affect our financial condition and results of operations. There can be no assurance, however, as to the actual impact that the foregoing or any other governmental program will have on the financial markets. The failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit and the trading price of our common stock. We expect to face increased regulation and supervision of our industry as a result of the existing financial crisis, and there will be additional requirements and conditions imposed on us to the extent that we participate in any of the programs established or to be established by the Treasury or by the federal bank regulatory agencies. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. The effects of such recently enacted, and proposed, legislation and regulatory programs on us cannot reliably be determined at this time. Because of our participation in the Troubled Asset Relief Program we are subject to several restrictions including, without limitation, restrictions on our ability to declare or pay dividends and repurchase our shares as well as restrictions on compensation paid to our executives. On November 14, 2008, in exchange for an aggregate purchase price of $17.0 million, we issued and sold to the Treasury pursuant to the Trouble Asset Relief Program ( TARP ) Capital Purchase Program the following: (i) 17,000 shares of our newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share and liquidation preference $1,000 per share ( Series A Preferred Stock ) and (ii) a warrant to purchase up to 405,405 shares of our common stock, no par value per share, at an exercise price of $6.29 per share, subject to certain anti-dilution and other adjustments. The warrant may be exercised for up to ten years after issuance. In connection with the issuance and sale of our securities, we entered into a Letter Agreement including the Securities Purchase Agreement Standard Terms, dated November 14, 2008, with the Treasury ( Agreement ). The Agreement contains limitations on the payment of quarterly cash dividends on our common stock in excess of $0.08 per share, and on our ability to repurchase our common stock. Our Series A Preferred Stock diminishes the net income available to our common shareholders and earnings per common share. The dividends accrued on the Series A Preferred Stock reduce the net income available to common shareholders and our earnings per common share. In 2009 our net income of $6.0 million was reduced to $5.1 million after deducting approximately $942,000 in dividends to the Treasury plus accretion on the Series A Preferred Stock. The Series A Preferred Stock is cumulative, which means that any dividends not declared or paid will accumulate and will be payable when the payment of dividends is resumed. The dividend rate on the Series A Preferred Stock will increase from 5% to 9% per annum five years after its original issuance if not earlier redeemed. If we are unable to redeem the Preferred Stock prior to the date of this increase, the cost of capital to us will increase substantially. Depending on our financial condition at the time, this increase in the Series A Preferred Stock annual dividend rate could have a material adverse effect on our earnings and could also adversely affect our ability to pay dividends on our common shares. Shares of Series A Preferred Stock will also receive preferential treatment in the event of the liquidation, dissolution or winding up of the Company. Additionally, the terms of the Series A Preferred Stock allow the Treasury to impose additional restrictions, including those on dividends and unilateral amendments required to comply with changes in applicable federal law. Table of Contents Our holders of the Series A Preferred Stock have certain voting rights that may adversely affect our common shareholders, and the holders of the Series A Preferred Stock may have interests different from our common shareholders. In the event that we fail to pay dividends on the Series A Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), the Treasury will have the right to appoint two directors to our Board of Directors until all accrued but unpaid dividends have been paid. Otherwise, except as required by law, holders of the Series A Preferred Stock have limited voting rights. So long as shares of Series A Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or our Articles of Incorporation, the vote or consent of holders of at least 662/3% of the shares of Series A Preferred Stock outstanding is required for: Any authorization or issuance of shares ranking senior to the Series A Preferred Stock; Any amendments to the rights of the Series A Preferred Stock so as to adversely affect the rights, preferences, privileges or voting power of the Series A Preferred Stock; or Consummation of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Series A Preferred Stock remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the Series A Preferred Stock. The holders of our Series A Preferred Stock, including the Treasury, may have different interests from the holders of our common stock, and could vote to block the foregoing transactions, even when considered desirable by, or in the best interests of, the holders of our common stock. We rely heavily on our management team and the loss of key officers may adversely affect operations. Our success has been and will continue to be greatly influenced by the ability to retain existing senior management and, with expansion, to attract and retain qualified additional senior and middle management. We recently had a number of changes in our senior management team, including the promotions of our new Chief Financial Officer and Chief Operating Officer and the appointment of a new Chief Risk Officer. The departure of any of our senior management could have an adverse effect on us. Our participation in the TARP Capital Purchase Program could also have an adverse effect on our ability to attract and retain qualified executive officers. Legislation and rules applicable to the TARP Capital Purchase Program participants include extensive new restrictions on our ability to pay retention awards, bonuses and other incentive compensation to our Chief Executive Officer during the period in which the Series A Preferred Stock is outstanding. Other restrictions are not limited to our Chief Executive Officer and cover other employees whose contributions to revenue and performance can be significant. The limitations may adversely affect our ability to recruit and retain these key employees in addition to our senior executive officers, especially if we are competing for talent against institutions that are not subject to the same restrictions. The Federal Reserve is contemplating proposed rules governing the compensation practices of financial institutions and these rules, if adopted, may adversely affect our management retention and limit our ability to promote our objectives through our compensation and incentive programs and, as a result, adversely affect our results of operations and financial condition. The full scope and impact of these limitations is uncertain and difficult to predict. The Secretary of the Treasury has adopted standards that implement certain compensation limitations, but these standards have not yet been broadly interpreted and remain, in many respects, ambiguous. The new and potential future legal requirements and implementing standards under the Capital Purchase Program may have unforeseen or unintended adverse effects on the financial services industry as a whole, and particularly on Capital Purchase Program participants, including us. It will likely require significant time, effort and resources on our part to interpret and apply them. If any of our regulators believe that we are not in compliance with new and future legal requirements and implementing standards, it could subject us to regulatory actions or otherwise adversely affect our management retention and, as a result, our results of operations and financial condition. Table of Contents Even if we redeem our Series A Preferred Stock and repurchase the warrant issued to the Treasury, we will continue to be subject to evolving legal and regulatory requirements that may, among other things, require increasing amounts of our time, effort and resources to ensure compliance. Internal control systems could fail to detect certain events. We are subject to many operating risks, including, without limitation, data processing system failures and errors, and customer or employee fraud. There can be no assurance that such an event will not occur, and if such an event is not prevented or detected by our other internal controls and does occur, and it is uninsured or is in excess of applicable insurance limits, it could have a significant adverse impact on our reputation in the business community and our business, financial condition and results of operations. Our operations could be interrupted if third party service providers experience difficulty, terminate their services or fail to comply with banking regulations. We depend, and will continue to depend to a significant extent, on a number of relationships with third-party service providers. Specifically, we utilize software and hardware systems for processing, essential web hosting, debit and credit card processing, merchant processing, Internet banking systems and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services, and we are unable to replace them with other qualified service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be materially adversely affected. Confidential customer information transmitted through the Bank s online banking service is vulnerable to security breaches and computer viruses, which could expose the Bank to litigation and adversely affect its reputation and ability to generate deposits. The Bank provides its customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. The Bank s network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. The Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that the Bank s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose us and the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank s systems and could adversely affect its reputation and our ability to generate deposits. Potential acquisitions may disrupt our business and dilute shareholder value. We continuously consider merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our stock s tangible book value and net income per common share may occur in connection with any future transaction. In addition, while loss sharing arrangements currently associated with FDIC-assisted transactions provide some level of risk reduction; these arrangements do not completely eliminate risk. To the extent we would participate in an FDIC-assisted transaction there can be no assurances that any positive expected results of such a transaction would fully materialize. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. We may seek merger or acquisition partners that are culturally similar, have experienced management and possess either significant market presence or have Table of Contents potential for improved profitability through financial management, economies of scale or expanded services. We do not currently have any specific plans, arrangements or understandings regarding such expansion. We cannot say with certainty that we will be able to consummate, or if consummated, successfully integrate future acquisitions or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make such acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational resources than us. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things: Potential exposure to unknown or contingent liabilities of the target company; Exposure to potential asset quality issues of the target company; Difficulty and expense of integrating the operations and personnel of the target company; Potential disruption to our business; The possible loss of key employees and customers of the target company; Difficulty in estimating the value of the target company; and Potential changes in banking or tax laws or regulations that may affect the target company. We are subject to extensive regulation which could adversely affect our business. Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Given the current disruption in the financial markets and potential new regulatory initiatives, including the Obama Administration s recent financial regulatory reform proposal, new regulations and laws that may affect us are increasingly likely. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (iv) otherwise adversely affect our business or prospects for business. Moreover, banking regulators have significant discretion and authority to address what regulators perceive to be unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority by banking regulators over us may have a negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition. FDIC insurance premiums increased substantially in 2009, and we expect to pay significantly higher FDIC premiums in the future. As the large number of recent bank failures continues to deplete the Deposit Insurance Fund, the FDIC adopted a revised risk-based deposit insurance assessment schedule in February 2009, which raised deposit insurance premiums. The FDIC also implemented a five basis point special assessment of each insured depository institution s assets minus Tier 1 capital as of June 30, 2009, which special assessment amount was capped at 10 basis points times the institution s assessment base for the second quarter of 2009. In addition, the FDIC recently approved a rule requiring financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010 through and including 2012 in order to re-capitalize the Deposit Insurance Fund. Accordingly, the Bank prepaid deposit insurance premiums in the amount of $3.3 million on December 31, 2009. The rule also provides for increasing the FDIC assessment rates by three basis points effective January 1, 2011. There can be no Table of Contents assurance that the FDIC will not increase premiums further or levy additional special assessments, either of which could have a material adverse effect on our results of operations and financial condition. Shares eligible for future sale could have a dilutive effect. Shares of our common stock eligible for future sale, including those that may be issued in connection with our various stock option and equity compensation plans, in possible acquisitions, and any other offering of our common stock for cash, and the issuance of 405,405 shares underlying the warrant issued to the Treasury pursuant to the TARP Capital Purchase Program, could have a dilutive effect on the market for our common stock and could adversely affect its market price. Our Articles of Incorporation authorize 50,000,000 shares of which 8,711,495 shares were outstanding as of March 11, 2010. In addition there are 282,080 shares subject to common stock options outstanding with a weighted average exercise price of $7.06 per share. Changes in accounting standards may impact how we report our financial condition and results of operations. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of prior period financial statements. A natural disaster or recurring energy shortage, especially in California, could harm our business. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections and maintain business interruption insurance, these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business, prospects, financial condition and results of operations. Our level of deposits may be volatile which could have an adverse effect on our liquidity, results of operations and cash flows. The Bank s depositors could choose to withdraw their deposits from the Bank and then put it into alternative investments, causing an increase in our funding costs and reducing net interest income. Checking, savings and money market account balances, including brokered deposits under the National CD Rate line program and eTN subscription program, can decrease when customers perceive that alternative investments, such as the stock market, may provide a better risk/return tradeoff. When customers move funds out of bank deposits into other investments, the Bank will lose a relatively low cost source of funds, increasing funding costs. At December 31, 2009, time certificates of deposit in excess of $100,000 represented approximately 39% of the dollar value of our total deposits. As such, these deposits are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits could adversely affect the liquidity of our profitability, business prospects, results of operations and cash flows. We monitor activity of volatile liability deposits on a quarterly basis. Table of Contents Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in the financial services business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from actual or alleged conduct in any number of activities, including lending practices, corporate governance or acquisitions, and from actions taken by government regulators and community organizations in response to that conduct. Changes in prevailing mortgage and interest rates could have an adverse effect on mortgage origination fees and the profitability of the mortgages we originate. Changes in interest rates greatly affect the mortgage banking business. Our mortgage subsidiary, Bank of Commerce Mortgagetm, originates, funds and services mortgage loans, which subjects the Company to various risks, including credit, liquidity and interest rate risks. Based on market conditions and other factors, the Company reduces unwanted credit and liquidity risks by selling some or all of the long-term fixed-rate mortgage loans and adjustable rate mortgages originated. Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity in the nonconforming secondary markets, our subsidiary mortgage banking revenue continued to be strong. Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination fees. Interest rates impact the amount and timing of origination because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment, and selling the loan, interest rate changes will impact origination fees with a lag. The amount and timing of the impact on origination fees will depend on the magnitude, speed and duration of the change in interest rates. A decline in interest rates increases the propensity for refinancing. As part of subsidiary mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, up to 60 days after inception of the rate lock. Outstanding loan commitments expose the Company to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. Mortgage banking revenue can be volatile from quarter to quarter. We earn revenue from fees for originating mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue from loan originations. It is also possible that, because of the recession and deteriorating housing market, even if interest rates were to fall, mortgage originations may also fall, with a corresponding impact on origination fees. Risks Related to this Offering and Ownership of Our Common Stock The market price of our common stock may decline after the offering. The price per share at which we sell the common stock in this offering may be more or less than the market price of our common stock on the date the offering is consummated. If the purchase price is greater than the market price at the time of sale, purchasers will experience an immediate decline in the market value of the common stock purchased in this offering. If the actual purchase price is less than the market price for the shares of common stock, some purchasers in the offering may be inclined to immediately sell shares of common stock to attempt to realize a profit. Any such sales, depending on the volume and timing, could cause the price of our common stock to decline. Additionally, because stock prices generally fluctuate over time, there is no assurance that purchasers of our common stock in the offering will be able to sell shares after the Table of Contents offering at a price that is equal to or greater than the actual purchase price. Purchasers should consider these possibilities in determining whether to purchase shares in the offering and the timing of any sales of shares of common stock. The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive. Stock price volatility may make it difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things: Actual or anticipated variations in quarterly results of operations; Recommendations by securities analysts; Operating and stock price performance of other companies that investors deem comparable to us; News reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic downturn; Perceptions in the marketplace regarding us and/or our competitors; Public sentiments toward the financial services and banking industry generally; New technology used, or services offered, by competitors; Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; Failure to integrate acquisitions or realize anticipated benefits from acquisitions; Changes in government regulations; and Geopolitical conditions such as acts or threats of terrorism or military conflicts. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital and credit markets. Our profitability measures could be adversely affected if we are unable to effectively deploy the capital raised in this offering. We intend to use the net proceeds of this offering as described below in USE OF PROCEEDS, including but not limited to possible opportunistic acquisitions, including FDIC-assisted transactions. Although we are periodically engaged in discussions with potential acquisition candidates, we are not currently party to any purchase or merger agreement. There can be no assurance that we will be able to negotiate future acquisitions on terms acceptable to us. Investing the proceeds of this offering in investment grade securities until we are able to deploy the proceeds would provide lower margins than we generally earn on loans, potentially adversely impacting shareholder returns, including earnings per share, net interest margin, return on assets and return on equity. Only a limited trading market exists for our common stock, which could lead to significant price volatility. Our common stock is traded on the NASDAQ Global Market under the trading symbol BOCH, but there have historically been low trading volumes in our common stock. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. Table of Contents Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that shareholders will be able to sell their shares at or above the price offered by this prospectus. Anti-takeover provisions in our articles of incorporation could make a third party acquisition of us difficult. In order to approve a merger or similar business combination with the owner of 20% or more of our common stock (an Interested Shareholder ), our Articles of Incorporation contain provisions that would require a supermajority vote of 662/3% of the outstanding shares of the common stock (excluding the shares held by the Interested Shareholder or its affiliates). These provisions further require that the per share consideration to be paid in such a transaction would have to equal or exceed the greater of (a) the highest per share price paid by the Interested Shareholder (i) within two years of the transaction proposal announcement date, or (ii) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement) and (b) the fair market value of the Common Stock on (i) the transaction proposal announcement date, or (ii) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement). The operation of these provisions could result in the Company becoming a less attractive target for a would-be acquirer. As a consequence, it is possible that shareholder would lose an opportunity to be paid a premium for their shares in an acquisition transaction. There may be future sales or other dilutions of our equity which may adversely affect the market price of our common stock. Except as described under UNDERWRITING, we are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive our common stock. In addition, we are not prohibited from issuing additional securities which are senior to our common stock. Because our decision to issue securities in any future offering will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. Thus, our shareholders bear the risk of any future stock issuances reducing the market price of our common stock and diluting their stock holdings in us. The exercise of the underwriters over-allotment option, the exercise of any options granted to our directors and employees, the exercise of the outstanding warrants for our common stock as referenced above, the issuance of shares of common stock in acquisitions and other issuances of our common stock could have an adverse effect on the market price of the shares of our common stock. In addition, the existence of options and warrants to acquire shares of our common stock may materially adversely affect the terms upon which we may be able to obtain additional capital in the future through the sale of equity securities. Any future issuances of shares of our common stock will be dilutive to existing shareholders. The holders of our preferred stock and trust preferred securities have rights that are senior to those of our holders of common stock and that may impact our ability to pay dividends on our common stock to our common shareholders and reduce net income available to our common shareholders. At December 31, 2009, our subsidiary trusts had outstanding $15.0 million of trust preferred securities. These securities are effectively senior to shares of common stock due to the priority of the underlying junior subordinated debt. As a result, we must make payments on our trust preferred securities before any dividends can be paid on our common stock; moreover, in the event of our bankruptcy, dissolution, or liquidation, the obligations outstanding with respect to our trust preferred securities must be satisfied before any distributions can be made to our shareholders. While we have the right to defer dividends on the trust preferred securities for a period of up to five years, if any such election is made, no dividends may be paid to our common or preferred shareholders during that time. Table of Contents We are required to pay cumulative dividends on the $17.0 million in Series A Preferred Stock issued to the Treasury in the TARP Capital Purchase Program at an annual rate of 5% for the first five years and 9% thereafter, unless we redeem the shares earlier. We may not declare or pay dividends on our common stock or repurchase shares of our common stock without first having paid all accrued cumulative preferred dividends that are due. Until January 2012, we also may not increase our per share common stock dividend rate or repurchase shares of our common shares without the Treasury s consent, unless the Treasury has transferred to third parties all the Series A Preferred Stock originally issued to it. Our future ability to pay dividends and repurchase stock is subject to restrictions. Since we are a holding company with no significant assets other than the Bank and our majority-owned mortgage company, we have no material source of income other than dividends received from the Bank and the mortgage company. Therefore, our ability to pay dividends to our shareholders will depend on the Bank s and mortgage company s ability to pay dividends to us. Moreover, banks and financial holding companies are both subject to certain federal and state regulatory restrictions on cash dividends. We are also restricted from paying dividends if we have deferred payments of the interest on, or an event of default has occurred with respect to, our trust preferred securities or Series A Preferred Stock. Additionally, terms and conditions of our Series A Preferred Stock place certain restrictions and limitations on our common stock dividends and repurchases of our common stock. See DIVIDEND POLICY. An investment is not an insured deposit. An investment in our common stock is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency. Your investment in our common stock will be subject to investment risk and you may lose all or part of your investment. USE OF PROCEEDS The net proceeds, after underwriting discounts and commissions and estimated expenses, to us from the sale of the common stock offered by this prospectus are expected to be approximately $ million. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $ million. We intend to use the net proceeds of this offering (i) for general corporate purposes, including contributing additional capital to the Bank, (ii) to support our ongoing and future anticipated growth, which may include opportunistic acquisitions of all or parts of other financial institutions, including FDIC-assisted transactions, and (iii) to position us for eventual redemption of our Series A Preferred Stock issued to the Treasury under the TARP Capital Purchase Program. We do not have any agreements or commitments with respect to any current transactions. Pending allocation of specific uses, we intend to invest the proceeds in short-term interest-bearing investment grade securities. Table of Contents CAPITALIZATION The following table shows our capitalization and regulatory capital ratios as of December 31, 2009 on an actual basis and on an as-adjusted basis to give effect to the receipt of the estimated net proceeds from this offering. The as-adjusted capitalization assumes no exercise of the underwriters over-allotment option, that 6,000,000 shares of common stock are sold by us at an offering price of $ per share (based on the closing price of our common stock on the NASDAQ Global Market on , 2010), and that the net proceeds from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, are approximately $ million. As of December 31, 2009 Actual As Adjusted(1) (Dollars in thousands, except per share data) Unaudited Junior subordinated debt payable to unconsolidated subsidiary grantor trusts $ 15,465 $ 15,465 Shareholders equity Preferred stock, liquidation preference of $1,000 per share; 2,000,000 authorized; 17,000 issued and outstanding as of December 31, 2009 $ 16,641 $ 16,641 Common stock, authorized 50,000,000 shares without par; issued and outstanding 8,711,495, actual; issued and outstanding 14,711,495 shares, as adjusted 9,730 Common stock warrant 449 449 Retained earnings 39,004 39,004 Accumulated other comprehensive gain, net of tax 658 658 Non controlling interest in subsidiary 2,325 2,325 Total shareholders equity $ 68,807 $ Total capitalization $ 84,272 $ Per Common Share Book value per share $ 5.72 $ Tangible book value per share 5.29 Regulatory Capital Ratios Company Leverage Ratio 9.89 % % Tier 1 Capital 12.06 % % Total Capital 13.31 % % Regulatory Capital Ratios Bank Leverage Ratio 9.37 % % Tier 1 Capital 11.57 % % Total Capital 12.83 % % (1) Assumes that 6,000,000 shares of our common stock are sold in this offering at $ per share, our closing price on , 2010, and that the net proceeds thereof are approximately $ million after deducting underwriting discounts and commissions and our estimated expenses. If the underwriters over-allotment option is exercised in full, net proceeds are expected to increase to approximately $ million. Table of Contents DIVIDEND POLICY The goals of our dividend policy and planning function are in accord with our subsidiary Bank s capital strategy and overall business plans and objectives. The following summarizes the general goals that pertain to our dividend management: Current and future capital adequacy is paramount in determining the amount of dividends we should pay to our shareholders; Ensure the safety and soundness of the Bank s deposits, while providing an appropriate return to our shareholders; Establish a dividend payout approach that provides consistency and opportunity for growth; and Explore new types of dividend vehicles and dividend payout programs. There were approximately 676 holders of our common stock as of December 31, 2009, including those held in street name, and the market price on that date was $5.28 per share. Cash dividends of $0.06 per share were paid on each of April 10, 2009, July 17, 2009, October 9, 2009 and January 15, 2010 to shareholders of record as of March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009. Cash dividends of $0.08 per share were paid on each of April 11, 2008, July 11, 2008, October 10, 2008 and January 10, 2009 to shareholders of record as of March 31, 2008, June 30, 2008, September 30, 2008 and December 31, 2008. On March 5, 2010, our Board of Directors declared a cash dividend of $0.06 per share to shareholders of record as of March 15, 2010, payable on March 26, 2010. Shares purchased in this offering will not be eligible to receive the March 2010 dividend. We currently expect to pay quarterly cash dividends of at least $0.06 per share in the future, but our ability to pay dividends is subject to the policy goals listed above and certain regulatory requirements. The Federal Reserve Board ( FRB ) generally prohibits a financial holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a financial services holding company s financial position. The FRB s policy is that a financial holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution such as the Bank to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. Pursuant to the terms of the agreements between us and the Treasury governing the TARP Capital Purchase Program, we may not declare or pay any dividend or make any distribution on our common stock other than (i) regular quarterly dividends not exceeding an annual aggregate of $0.32 per share; (ii) dividends payable solely in shares of our common stock; and (iii) dividends or distributions of rights of junior stock in connection with a shareholder rights plan. In addition to the restrictions imposed under federal law, banks chartered under California law generally may pay cash dividends only to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank s net income for its last three fiscal years (less any distributions to shareholders during such period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner of the Department of Financial Institutions in an amount not exceeding the greatest of the bank s retained earnings, the bank s net income for its last fiscal year, or the bank s net income for its current fiscal year. Holding Company Dividends All dividends declared and distributed by us will comply with applicable state corporate law. The Board of Directors will declare dividends only if our Bank subsidiary is considered to have adequate and strong earnings. Dividends will be declared and ultimately paid only if they are covered by earnings, not paid by Table of Contents using borrowed funds, and not a result of unusual or nonrecurring gains. All dividends will comply with this policy. The financial markets and shareholders favorably view a consistent dividend. Future capital requirements and corporate plans will be considered whenever dividends are initiated, increased or decreased. On March 5, 2010 the Board of Directors declared a dividend of $0.06 to shareholders of record as of March 15, 2010 payable on March 26, 2010. As a result, investors in this offering will not be entitled to receive the dividend on shares purchased in this offering. PRICE RANGE OF COMMON STOCK The following table presents the range of high and low sale prices of our common stock as reported on the NASDAQ Global Market for the periods shown below: Sale Price per Share High Low Year Ending December 31, 2010 First Quarter (through March 11, 2010) $ 5.50 4.95 Year Ended December 31, 2009 First Quarter 5.05 3.90 Second Quarter 6.52 4.08 Third Quarter 6.30 4.50 Fourth Quarter 5.99 5.10 Year Ended December 31, 2008 First Quarter 8.59 6.00 Second Quarter 8.34 6.10 Third Quarter 6.95 5.50 Fourth Quarter 6.60 3.92 Year Ended December 31, 2007 First Quarter 12.29 10.98 Second Quarter 12.50 10.82 Third Quarter 11.54 9.45 Fourth Quarter 11.64 8.45 As of December 31, 2009, there were 676 holders of record of our common stock and 8,711,495 shares of our common stock issued and outstanding. On , 2010, the closing sale price for our common stock was $ per share, as reported on the NASDAQ Global Market. DESCRIPTION OF CAPITAL STOCK We are currently authorized to issue two classes of shares designated respectively Common Stock and Preferred Stock. The number of shares of Common Stock authorized is 50,000,000 and the number of shares of Preferred Stock authorized is 2,000,000. Preferred Stock and Warrants The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock. In addition, the Board of Directors is authorized, within the limits and restrictions stated in any resolution or Table of Contents resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. We are authorized to issue 2,000,000 shares of preferred stock. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but generally have no voting rights. Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement Standard Terms ( Securities Purchase Agreement ) we issued to the Treasury 17,000 shares of our Series A Preferred Stock for a total price of $17.0 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Except under limited circumstances, the Series A Preferred Stock is non-voting. If dividends on the Series A Preferred Stock have not been paid for an aggregate of six quarterly dividend periods (whether or not consecutive), the holders of the Series A Preferred Stock will be entitled to elect two additional members of our board of directors, at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the next annual meeting), and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid. Prior to November 14, 2011, unless we have redeemed the Series A Preferred Stock or the Treasury has transferred the Series A Preferred Stock to a third party, the consent of the Treasury will be required for us to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. A consequence of the Series A Preferred Stock purchase includes certain restrictions on executive compensation. As part of its purchase of the Series A Preferred Stock, the Treasury received a warrant ( Warrant ) to purchase 405,405 shares of our common stock at an initial per share exercise price of $6.29. The Warrant provides for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. Pursuant to the Securities Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1 capital. The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act. Upon the request of the Treasury at any time, we have agreed to promptly enter into a deposit arrangement pursuant to which the Series A Preferred Stock may be deposited and depositary shares ( Depositary Shares ) may be issued. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer. Prior to November 14, 2011, unless we have redeemed the Series A Preferred Stock or the Treasury has transferred the Series A Preferred Stock to a third party, the consent of the Treasury will be required for us to (i) declare or pay any dividend or make any distribution on our common stock (other than regular quarterly cash dividends of not more than $0.08 per share of common stock) or (ii) redeem, purchase or acquire any shares of the Company s common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. The proceeds from the Treasury were allocated based on the relative fair value of the Warrant as compared with the fair value of the preferred stock. The fair value of the Warrant was determined using a valuation model which incorporates assumptions including our common stock price, dividend yield, stock price volatility and the risk-free interest rate. The fair value is determined based on assumptions regarding the discount rate (market rate) on our Series A Preferred Stock which was estimated to be approximately 9% at the date of issuance. The discount will be accreted to par value over a five-year term, which is the expected Table of Contents life of our Series A Preferred Stock. Capital Purchase Program participants may opt out by repaying the capital without raising additional capital subject to consultation with the appropriate federal regulator. Common Stock Subject to preferences that may be applicable to Preferred Stock, the holders of common stock share equally on a per share basis any dividends declared by the board of directors out of funds legally available. If the Company is liquidated, dissolved or wound up, the holders of our common stock will be entitled to a ratable share of any distribution to shareholders, after satisfaction of all of our liabilities and of the prior rights of then outstanding preferred stock. The common stock does not include preemptive or other subscription rights to purchase additional shares. Holders of our common stock have the right to vote on matters submitted to a vote of our shareholders. Under California corporate law, holders of common stock are entitled to exercise such voting rights on a cumulative basis, unless the Company adopts a provision in its Articles of Incorporation or By-Laws to eliminate cumulative voting. In accordance with Section 301.5 of the California Corporations Code, a corporation whose shares are listed for trading on an approved exchange may eliminate cumulative voting for directors by amendment to its articles of incorporation or its bylaws. Cumulative voting means that each shareholder may cumulate, and cast, a number of votes equal to number of shares held, multiplied by the number of directors to be elected. Under cumulative voting, a shareholder may withhold votes from certain candidates and cast all such cumulated votes for a single candidate or split the cumulated votes between multiple candidates. At our 2010 Annual Meeting of Shareholders we intend to, among other things, submit a proposal to our shareholders to amend our By-Laws to eliminate cumulative voting for directors to the extent allowed under the California Corporations Code. The amendment to eliminate cumulative voting for directors must be approved by the holders of a majority of outstanding shares of our common stock. Our common stock is listed on the NASDAQ Global Market under the symbol BOCH. Transfer Agent and Registrar The transfer agent and registrar for our common stock is Registrar and Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016. Telephone (800) 368-5948. Restrictions on Ownership The Bank Holding Company Act ( BHCA ) generally prohibits any company that is not engaged in banking activities and activities that are permissible for a bank holding company or a financial holding company from acquiring control of us. Any holder of 25% or more of our common stock, or a holder of 5% or more if such holder otherwise exercises a controlling influence over us, will generally deemed to control us, and may be subject to regulation as a bank holding company under the BHCA. Any existing bank holding company would need the prior approval of the Federal Reserve Board before acquiring 5% or more of our voting stock. In addition, the Change in Bank Control Act of 1978, as amended, prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as ours, could constitute acquisition of control of the bank holding company. Under the California Financial Code, no person shall, directly or indirectly, acquire control of a California state bank or its holding company unless the Department of Financial Institutions has approved such acquisition of control. A person would be deemed to have acquired control of us if such person, directly or indirectly, has the power (i) to vote 25% or more of our voting power, or (ii) to direct or cause the direction of the management and our policies. For purposes of this law, a person who directly or indirectly owns or controls 10% or more of our outstanding common stock would be presumed to control of us. Table of Contents In order to approve a merger or similar business combination with the owner of 20% or more of our common stock (an Interested Shareholder ), our Articles of Incorporation contain provisions that would require a supermajority vote of 662/3% of the outstanding shares of the common stock (excluding the shares held by the Interested Shareholder or its affiliates). These provisions further require that the per share consideration to be paid in such a transaction would have to equal or exceed the greater of (a) the highest per share price paid by the Interested Shareholder (i) within two years of the transaction proposal announcement date, or (ii) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement) and (b) the fair market value of the Common Stock on (i) the transaction proposal announcement date, or (ii) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement). Table of Contents UNDERWRITING We are offering the shares of our common stock described in this prospectus in an underwritten offering in which Howe Barnes Hoefer Arnett, Inc. is acting as representative of the underwriters. We have entered into an underwriting agreement with Howe Barnes Hoefer Arnett, Inc., acting as representative of the underwriters named below, with respect to the common stock being offered. Subject to the terms and conditions contained in the underwriting agreement, the underwriters have agreed to purchase the respective number of shares of our common stock set forth opposite its name below. Name Number of Shares Howe Barnes Hoefer Arnett, Inc. Total Under the terms and conditions of the underwriting agreement, the underwriters are committed to accept and pay for all of the shares, if any are taken. In the underwriting agreement, the obligations of the underwriters are subject to approval of certain legal matters by their counsel, including the authorization and the validity of the shares, and to other conditions contained in the underwriting agreement, such as receipt by the underwriters of officers certificates and legal opinions. Over-Allotment Option We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to additional shares of our common stock. The underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of the shares being offered by this prospectus. Lock-Up Agreements Our executive officers and directors have agreed that for a period of 90 days from the date of this prospectus, none of our executive officers or directors will, without the prior written consent of Howe Barnes Hoefer Arnett, Inc., as the representative of the underwriters, subject to certain exceptions, sell, offer to sell or otherwise dispose of or transfer any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock. Howe Barnes Hoefer Arnett, Inc., in its sole discretion, may release the securities subject to these lock-up agreements at any time without notice. Commissions and Expenses The underwriters propose to offer the shares of our common stock directly to the public at the public offering price set forth above, and to certain securities dealers at this price, less a concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a concession not in excess of $ per share to certain brokers and dealers. The table below shows the per share and total underwriting discounts and commissions that we will pay to the underwriters and the proceeds we will receive before expenses. We estimate that the total expenses of this offering payable by us, not including the underwriting discounts and commissions but including our reimbursement of up to $80,000 of documented out-of-pocket expenses of the underwriters, will be approximately $250,000. Total Without Total with Option Option Per Share Exercised Exercised Public offering price $ $ $ Underwriting discount Proceeds to us, before expenses Table of Contents The offering of the shares of our common stock will be made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject any order for the purchase of the shares. After the shares are released for sale to the public, the underwriters may, from time to time, change the offering price and other selling terms. Neither we nor the underwriters can assure you that an active and liquid market will develop for the shares or, if developed, that the market will continue. The offering price and distribution rate was determined by negotiations between the underwriters and us, and the offering price of the shares may not be indicative of the market price following the offering. The underwriters will have no obligation to make a market in the shares, however, and may cease market-making activities, if commenced, at any time. Indemnity Under the underwriting agreement, we have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended ( Securities Act ) and to contribute to payments that the underwriters may be required to make in respect of these liabilities. Stabilization In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, covering transactions, and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the Exchange Act ). Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. Covering transactions involve the purchase of common stock in the open market after the distribution has been completed in order to cover short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. Penalty bids permit the underwriters to reclaim a selling concession from a selected dealer when the common stock originally sold by the selected dealer is purchased in a stabilizing covering transaction to cover short positions. These stabilizing transactions, covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected on the NASDAQ Global Market or otherwise and, if commenced, may be discontinued at any time. TABLE OF CONTENTS Page CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS ii ABOUT THIS PROSPECTUS iii WHERE YOU CAN FIND MORE INFORMATION iii PROSPECTUS SUMMARY 1 SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION 6 RISK FACTORS 8

parsed_sections/risk_factors/2010/CIK0000706874_palmetto_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock involves risks. In evaluating an investment in our common stock, you should consider carefully the risks described below, which discuss the most significant factors that affect an investment in our common stock, together with the other information included or incorporated by reference in this prospectus, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, and the risks we have highlighted in other sections of this prospectus. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties not presently known to us or that we currently deem immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected. If this were to happen, the value of our common stock could decline, and if you invest in our common stock, you could lose all or part of your investment. The discussion below highlights some important risks we have identified related to our business and operations and an investment in shares of our common stock, but these should not be assumed to be the only factors that could affect our future performance and condition, financial and otherwise. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements. Risks Related to our Business We have entered into a Consent Order under which our regulators will require us to take certain actions. In November 2009, the FDIC and the State Board conducted their annual joint examination of the bank. As a result of the examination, the bank agreed to the issuance of the Consent Order, effective June 10, 2010, with the FDIC and the State Board. The Consent Order seeks to enhance the bank s existing practices and procedures in the areas of credit quality, liquidity, earnings, capital, and other areas. In response to the company s negative financial results and in preparation for the Supervisory Authorities annual joint examination, in June 2009 our Board of Directors and management adopted and began executing a proactive and aggressive Strategic Project Plan (the Plan ) to address the issues related to credit quality, liquidity, earnings, and capital. Since June 2009, our Board of Directors and management have been, and continue to be, keenly focused on executing the Plan and, through execution of this Plan, have already complied with numerous requirements of the Consent Order. Specific to the capital requirements of the Consent Order, as described in this prospectus, on October 7, 2010 we consummated the private placement transaction pursuant to which we issued 39,975,980 shares of our common stock at $2.60 per share for an aggregate purchase price of approximately $103.9 million. We intend to take all actions necessary to enable the bank to comply with the requirements of the Consent Order, and as of the date hereof we have submitted all documentation required as of this date to the Supervisory Authorities. There can be no assurance that the bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the Supervisory Authorities. However, we believe we are currently in compliance with all provisions of the Consent Order except for the provision that requires reductions of criticized assets of specified percentages by certain dates, with the first requirement being 25% by December 6, 2010. As of the date hereof, we have already reduced our criticized assets by more than 25%. Failure to meet the requirements of the Consent Order could result in additional regulatory requirements, which could ultimately lead to the bank being taken into receivership by the FDIC. We may have higher loan losses than we have allowed for in our allowance for loan losses. Our actual loan losses could exceed our allowance for loan losses and therefore our historic allowance for loan losses may not be adequate. As of September 30, 2010, approximately 66.4% of our loan portfolio was Table of Contents secured by commercial real estate. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers. We have a concentration of credit exposure in commercial real estate and a downturn in commercial real estate could adversely affect our business, financial condition, and results of operations. At September 30, 2010, 66.4% of our loan portfolio was secured by commercial real estate. Loans secured by commercial real estate are generally viewed as having more risk of default than loans secured by residential real estate or consumer loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers, the accuracy of the estimate of the property s value at completion of construction, and the estimated cost of construction. Such loans are generally more risky than loans secured by residential real estate or consumer loans because those loans are typically not secured by real estate collateral. An adverse development with respect to one lending relationship can expose us to a significantly greater risk of loss compared with a single-family residential mortgage loan because we typically have more than one loan with such borrowers. Additionally, these loans typically involve larger loan balances to single borrowers or groups of related borrowers compared with single-family residential mortgage loans. Therefore, the deterioration of one or a few of these loans could cause a significant decline in the related asset quality. In addition, many economists believe that deterioration in income producing commercial real estate is likely to worsen as vacancy rates continue to rise and absorption rates of existing square footage and/or units continue to decline. Because of the general economic slowdown we are currently experiencing, these loans represent higher risk and could result in a sharp increase in loans charged-off and could require us to significantly increase our allowance for loan losses, which could have a material adverse impact on our business, financial condition, results of operations, and cash flows. A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business. At September 30, 2010, approximately 86.9% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. We have identified credit concerns with respect to certain loans in our loan portfolio which are primarily related to the downturn in the real estate market. The real estate market has been substantially impacted by the current economic environment, increased levels of inventories of unsold homes, and higher foreclosure rates. As a result, property values for this type of collateral have declined substantially and market appraisal assumptions continue to trend downward significantly. These loans carry a higher degree of risk than long-term financing of existing real estate since repayment is dependent on the ultimate completion of the project or home and usually on the sale of the property or permanent financing. Slow housing conditions have affected some of these borrowers ability to sell the completed projects in a timely manner, and we believe that these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. As a result, we incurred substantially higher charge-offs in 2009 and through the first nine months of 2010 and increased our allowance for loan losses during these periods to address the probable credit risks inherent within our loan portfolio. Further deterioration in the South Carolina real estate market may cause us to adjust our opinion of the level of credit quality in our loan portfolio. Such a determination may lead to an additional increase in our provisions for loan losses, which could also adversely impact our business, financial condition, and results of operations Table of Contents Recent legislation and administrative actions authorizing the U.S. government to take direct actions within the financial services industry may not stabilize the U.S. financial system. The Emergency Economic Stabilization Act of 2008 (the EESA ) was enacted on October 3, 2008. Under the EESA, the U.S. Treasury has the authority to, among other things, invest in financial institutions and purchase up to $700 billion of troubled assets and mortgages from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Under the U.S. Treasury s Capital Purchase Program, it committed to purchase up to $250 billion of preferred stock and warrants in eligible institutions. The EESA also temporarily increased FDIC deposit insurance coverage to $250,000 per depositor through December 31, 2009, which was recently permanently increased to $250,000 under the Dodd-Frank Act. On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan which, among other things, provides a forward-looking supervisory capital assessment program that is mandatory for banking institutions with over $100 billion of assets and makes capital available to financial institutions qualifying under a process and criteria similar to the U.S. Treasury s Capital Purchase Program. In addition, the American Recovery and Reinvestment Act of 2009 (the ARRA ) was signed into law on February 17, 2009, and includes, among other things, extensive new restrictions on the compensation and governance arrangements of financial institutions. On July 21, 2010, the President signed into law the Dodd-Frank Act, a comprehensive regulatory framework that will affect every financial institution in the U.S. The Dodd-Frank Act includes, among other measures, changes to the deposit insurance and financial regulatory systems, enhanced bank capital requirements and provisions designed to protect consumers in financial transactions. Regulators agencies will implement new regulations in the future which will establish the parameters of the new regulatory framework and provide a clearer understanding of the legislation s effect on banks. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity, and leverage requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others: a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards; increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums; the limitation on our ability to raise capital through the use of trust preferred securities as these securities may no longer be included as Tier 1 capital going forward; and the limitation on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations. Numerous actions have been taken by the U.S. Congress, the Board of Governors of the Federal Reserve System (the Federal Reserve ), the U.S. Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime mortgage crisis that commenced in 2007, including the Financial Stability Program adopted by the U.S. Treasury. We cannot predict the actual effects of EESA, ARRA, the Dodd-Frank Act, and various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the economy, the financial markets, on us. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions, could materially and adversely affect our business, financial condition, results of operations, and the price of our common stock. Table of Contents Recent negative developments in the financial industry and the domestic and international credit markets may adversely affect our operations and results. Negative developments in the global credit and securitization markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing throughout the remainder of 2010. As a result of this credit crunch, commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Global securities markets, and bank holding company stock prices in particular, have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. Bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. We can provide no assurance regarding the manner in which any new laws and regulations will affect us. Our focus on lending to small to mid-sized community-based businesses may increase our credit risk. Most of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this important customer sector, our results of operations and financial condition and the value of our common may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations. Our decisions regarding credit risk and allowance for loan losses may materially and adversely affect our business. Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including: the duration of the credit; credit risks of a particular customer; changes in economic and industry conditions; and in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including: evaluations of the collectability of loans in our portfolio, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio; economic conditions that may impact the overall loan portfolio or an individual borrower s ability to repay; Table of Contents the amount and quality of collateral securing the loans; our historical loan loss experience, and borrower and collateral specific considerations for loans individually evaluated for impairment. There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital. Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results. Continuation of the economic downturn could reduce our customer base, our level of deposits, and demand for financial products such as loans. Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our markets. The current economic downturn has negatively affected the markets in which we operate and, in turn, the quality of our loan portfolio. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally remain unfavorable, our business may not succeed. A continuation of the economic downturn or prolonged recession would likely result in the continued deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business. Interest received on loans represented approximately 91.1% of our interest income for the year ended December 31, 2009, and 92.9% for the nine months ended September 30, 2010. If the economic downturn continues or a prolonged economic recession occurs in the economy as a whole, borrowers will be less likely to repay their loans as scheduled. Moreover, in many cases the value of real estate or other collateral that secures our loans has been adversely affected by the economic conditions and could continue to be negatively affected. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. A continued economic downturn could, therefore, result in losses that materially and adversely affect our business. Liquidity risks could affect operations and jeopardize our financial condition. The goal of liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities and withdrawals, and other cash commitments under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this goal, our Asset/Liability Committee establishes liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. Liquidity is essential to our business. An inability to raise funds through traditional deposits, borrowings, the sale of securities or loans, issuance of additional equity securities, and other sources could have a substantial negative impact on our liquidity. Our access to funding sources in amounts adequate to finance our activities and with terms acceptable to us could be impaired by factors that impact us specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as the current disruption in the financial markets and negative views and expectations about the prospects for the financial services industry as a result of the continuing turmoil and deterioration in the credit markets. Table of Contents Historically, we have relied on traditional and nontraditional deposits, advances from the Federal Home Loan Bank (the FHLB ), funding from correspondent banks, and other borrowings to fund our operations. As a result of negative financial performance indicators, some of the bank s various sources of liquidity are now restricted. The bank s credit risk rating at the FHLB has been negatively impacted, resulting, initially, in reduced borrowing capacity. In January 2010, we were notified by the FHLB that it will not allow incremental advances until our financial condition improves. In addition, there is also a risk that the bank s ability to borrow from the Federal Reserve Discount Window could be curtailed or eliminated. We actively monitor the depository institutions that hold our federal funds sold and due from banks cash balances. We cannot provide assurances that access to our cash and cash equivalents and federal funds sold will not be impacted by adverse conditions in the financial markets. Our emphasis is primarily on safety of principal, and we diversify cash, due from banks, and federal funds sold among counterparties to minimize exposure relating to any one of these entities. We routinely review the financials of our counterparties as part of our risk management process. Balances in our accounts with financial institutions in the U.S. may exceed the FDIC insurance limits. While we monitor and adjust the balances in our accounts as appropriate, these balances could be impacted if the financial institutions fail. Because we were not well-capitalized at September 30, 2010, although we had none at or since September 30, 2010, we may not accept brokered deposits unless a waiver is granted by the FDIC. Although we currently do not utilize brokered deposits as a funding source, if we were to seek to begin using such funding source, there is no assurance that the FDIC will grant us the approval when requested. These restrictions could have a substantial negative impact on our liquidity. Additionally, we would normally be restricted from offering an effective yield on deposits of more than 75 basis points over the national rates published by the FDIC weekly on their website. However, on April 1, 2010, we were notified by the FDIC that they had determined that the geographic areas in which we operate were considered high-rate areas. Accordingly, we are able to offer interest rates on deposits up to 75 basis points over the prevailing interest rates in our geographic areas. There can be no assurance that our sources of funds will be adequate for our liquidity needs, and we may be compelled to seek additional sources of financing in the future. Specifically, we may seek additional debt in the future to achieve our business objectives. There can be no assurance that additional borrowings, if sought, would be available to us or, if available, would be on favorable terms. Bank and holding company stock prices have been negatively impacted by the recent adverse economic conditions, as has the ability of banks and holding companies to raise capital or borrow in the debt markets. If additional financing sources are unavailable or not available on reasonable terms, our business, financial condition, results of operations, cash flows, and future prospects could be materially adversely impacted. We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract customers. The banking business is highly competitive, and we experience competition in our market from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks, that we do not provide. There is a risk that we will not be able to compete successfully with other financial institutions in our market, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. Table of Contents Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition. The bank s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC (the DIF ) and are subject to deposit insurance assessments to maintain the deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Due to the failures of several unaffiliated FDIC-insured depository institutions, and the FDIC s new Temporary Liquidity Guarantee Program, the deposit insurance premium assessments paid by all banks have increased. In addition to the increases to deposit insurance assessments approved by the FDIC, the bank s risk category also changed as of June 30, 2009, as a result of the risk-based capital ratios which also increased the bank s premium assessments. The FDIC assessed a 5-basis point special assessment which was paid in September 2009. Also in September 2009, the FDIC adopted a Notice of Proposed Rulemaking to require insured financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012. We applied for and received an exemption to the prepayment assessment. The FDIC also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011. The FDIC has also indicated that it intends to propose changes to the deposit insurance premium assessment system that will shift a greater share of any increase in such assessments onto institutions with higher risk profiles. Amendments to the Federal Deposit Insurance Act by the Dodd-Frank Act also revise the assessment base against which an insured depository institution s deposit insurance premiums paid to the DIF will be calculated. Under the amendments, the assessment base will no longer be the depository institution s deposit base, but rather its average consolidated total assets less its average equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35 % of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. As a result, we anticipate our future insurance costs to be substantially higher than in previous periods. Although we cannot predict what the insurance assessment rates will be in the future, further deterioration in either risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows. The FDIC may terminate deposit insurance of any insured depository institution if it determines that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. It also may suspend deposit insurance temporarily if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Changes in prevailing interest rates may reduce our profitability. One of the key measures of our success is our amount of net interest income. Net interest income is the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. We are subject to interest rate risk because: Assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, net income will initially decline), Assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on transaction and savings deposit accounts by an amount that is less than the general decline in market interest rates), Table of Contents Short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may impact new loan yields and funding costs differently), and/or The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the investment securities available for sale portfolio may prepay significantly earlier than anticipated, which could reduce portfolio income). Interest rates may also have a direct or indirect impact on loan demand, credit losses, mortgage origination volume, the mortgage-servicing rights portfolio, the value of our pension plan assets and liabilities, and other financial instruments directly or indirectly impacting net income. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows. We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects. We depend on a limited number of key management personnel. The loss of key personnel could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. As a result, our Board of Directors may have to search outside of the bank for qualified permanent replacements. This search may be prolonged, and we cannot provide assurance that we would be able to locate and hire qualified replacements. We are subject to extensive regulation that could limit or restrict our activities. We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. See also Risk Factors Recent negative developments in the financial services industry and the domestic and international credit markets may adversely affect our operations and results. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act ), and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. To comply with the Sarbanes-Oxley Act, we have previously hired outside consultants to assist with our internal audit and internal control functions. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification for 2009. The auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act are annual and therefore will be completed as of December 31, 2010. We currently anticipate that our auditors will be able to provide the attestation relating to internal controls and all other aspects of Section 404 in 2010. In the event internal control deficiencies are identified in the future that we are unable to remediate in a timely manner or if we are not able to maintain the requirements of Section 404, we could be Table of Contents subject to scrutiny by regulatory authorities and the trading price of our stock could decline. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors and regulators could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. We currently anticipate that we will continue to comply with the requirements relating to internal controls and all other aspects of Section 404 within required time frames. If we were to grow in the future or incur additional credit losses, we may need to raise additional capital in the future, but that capital may not be available when it is needed. We are required by regulatory authorities to maintain adequate levels of capital to support our operations. If we grow in the future or incur additional credit losses, we may need to raise additional capital. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital on acceptable terms when needed, our ability to expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, your interest could be diluted. We will face risks with respect to expansion through acquisitions or mergers. From time to time we may seek to acquire other financial institutions or parts of those institutions. We may also expand into new markets or lines of business or offer new products or services. These activities would involve a number of risks, including: the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution; the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and the risk of loss of key employees and customers. We may incur substantial costs to expand, and such expansion may not result in the levels of profits we seek. Integration efforts for any future mergers and acquisitions may not be successful and following any future merger or acquisition, after giving it effect, we may not achieve our expected benefits of the acquisition within the desired time frame, if at all. We are not currently eligible to participate in FDIC-assisted acquisitions of assets and liabilities of failed banks, and there can be no assurances that we will be eligible to participate in such acquisitions in the future or that, if we were eligible, we would seek to participate in such acquisitions. However, we may possibly seek opportunities in the future to acquire the assets and liabilities of failed banks in FDIC-assisted transactions. FDIC-assisted acquisitions present the risks of acquisitions generally as well as some risks specific to these transactions. Although these FDIC-assisted transactions often provide for FDIC assistance to an acquirer to mitigate certain risks, which may include loss-sharing, where the FDIC absorbs most losses on covered assets and provides some indemnity, we would be subject to many of the same risks we would face in acquiring another bank in a negotiated transaction, without FDIC assistance, including risks associated with pricing such transactions, the risks of loss of deposits and maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the timeframes we expect. In addition, because these acquisitions provide for limited diligence and negotiation of terms, these transactions may require additional resources and time, servicing acquired problem loans and costs related to integration of personnel and operating Table of Contents systems, the establishment of processes to service acquired assets, require us to raise additional capital, which may be dilutive to our existing shareholders. If we decided to participate in FDIC-assisted acquisitions and were unable to manage these risks, then such acquisitions could have a material adverse effect on our business, financial condition and results of operations. Our underwriting decisions may materially and adversely affect our business. While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines, or both. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio. We are exposed to the possibility of technology failure. We rely on our computer systems and the technology of outside service providers. Our daily operations depend on the operational effectiveness of this technology. We rely on our systems to accurately track and record our assets and liabilities. If our computer systems or outside technology sources become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could materially affect our business operations and financial condition. Failure to comply with government regulation and supervision could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation. Our operations are subject to extensive regulation by federal, state, and local governmental authorities. Given the current disruption in the financial markets, we expect that the government will continue to pass new regulations and laws that will impact us. Compliance with such regulations may increase our costs and limit our ability to pursue business opportunities. Failure to comply with laws, regulations, and policies could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation. While we have policies and procedures in place that are designed to prevent violations of these laws, regulations, and policies, there can be no assurance that such violations will not occur. If our deferred tax asset becomes impaired in the future, our earnings and capital position may be adversely impacted. Deferred income tax represents the tax impact of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by us to determine if they are realizable. Factors in our determination include the ability to carry back or carry forward net operating losses and the performance of the business including the ability to generate taxable income from a variety of sources and tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance against the deferred tax asset must be established with a corresponding charge to net income. As of September 30, 2010, net deferred tax assets totaling $13.2 million were recorded in the Company s Consolidated Balance Sheet. As of that date, we determined that $351 thousand of our net deferred tax assets are realizable based primarily on an available refund from net operating loss carryback against income taxes previously paid in 2008, and $12.8 million is supported by tax planning strategies and projections of future taxable income. Accordingly, no valuation allowance is recorded against net deferred tax assets as of September 30, 2010. In addition, the private placement that was consummated on October 7, 2010 is considered a change in control under the Internal Revenue Service rules. Accordingly, with the assistance of third party specialists we are in the process of determining the fair values of our assets for purposes of evaluating any potential limitations or deferrals of our ability to utilize in the future the net operating losses incurred through the Table of Contents consummation date and / or any built in losses as of the consummation date. Any such limitation or deferrals could result in the need to record a valuation allowance against all or a portion of our deferred tax assets. We expect to have our analysis completed in the fourth quarter 2010. Realization of a deferred tax asset requires us to apply significant judgment and is inherently subjective because it requires the future occurrence of circumstances that cannot be predicted with certainty. We may not achieve sufficient future taxable income as the basis for the ultimate realization of our net deferred tax asset, and, therefore, we may have to establish a full or partial valuation allowance at some point in the future. If we determine that a valuation allowance is necessary, it would require us to incur a charge to our results of operations that would adversely impact our earnings and capital position. Risks Related to our Common Stock Our ability to pay dividends on our common stock is restricted. We have not paid a dividend on our common stock since the first quarter of 2009. The holders of our common stock are entitled to receive dividends, when and if declared by the Board of Directors, out of funds legally available for such dividends. We are a legal entity separate and distinct from the bank and have historically relied on dividends from the bank as a viable source of funds to service our operating expenses, which typically include dividends to holders of our common stock; however, given the bank s recent losses and the restrictions imposed by the Consent Order with the Supervisory Authorities, this source of liquidity is not currently available nor is it expected to be available for the foreseeable future. We and the bank are subject to regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Federal regulatory authorities are authorized to determine under certain circumstances that the payment of dividends by a bank holding company or a bank would be an unsafe or unsound practice and to prohibit payment of those dividends. Federal regulatory authorities have indicated that banking organizations should generally pay dividends only out of current income. In addition, as a South Carolina chartered bank, the bank is subject to limitations on the amount of dividends that it is permitted to pay. We may issue additional shares of common or preferred stock securities, which may dilute the interests of our shareholders and may adversely affect the market price of our common stock. We are currently authorized to issue up to 75,000,000 shares of common stock, of which 46,617,255 shares were outstanding as of October 7, 2010, and up to 2,500,000 shares of preferred stock, of which no shares are outstanding. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the remaining authorized but unissued shares and to establish the terms of any series of preferred stock. We may seek additional equity capital in the future as we expand our operations. Any issuance of additional shares of common stock or preferred stock will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Because there is no public trading market for our common stock, investors that purchase our common stock may not be able to resell their shares at or above the purchase price paid by them. Our common stock is not listed on any national securities exchange or quoted on the OTC Bulletin Board. Our common stock is, however, quoted on the Pink Sheets under the symbol PLMT.PK . Although our common stock is quoted on the Pink Sheets, there is currently no public trading market of our common stock and the market price of our common stock may be difficult to ascertain. As a result, investors in our common stock may not be able to resell their shares at or above the purchase price paid by them or may not be able to resell them at all. Table of Contents Our common stock is controlled by one or more shareholders whose interests may conflict with those of our other shareholders. CapGen owns approximately 45.4% of our outstanding shares of common stock as of October 7, 2010. As a result, CapGen will be able to exercise significant influence on our business as shareholders, including influence over election of our Board of Directors and the authorization of other corporate actions requiring shareholder approval. In deciding on how to vote on certain proposals, our shareholders should be aware that CapGen may have interests that are different from, or in addition to, the interests of our other shareholders. A holder with as little as a 5% interest in our company could, under certain circumstances, be subject to regulation as a bank holding company and possibly other restrictions. Any entity (including a group composed of natural persons) owning 25% or more of our outstanding common stock, or 5% or more if such holder otherwise exercises a controlling influence over us, may be subject to regulation as a bank holding company in accordance with the Bank Holding Company Act of 1956, or the BHCA. In addition, (1) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain 5% or more of our outstanding common stock and (2) any person other than a bank holding company may be required to obtain regulatory approval under the Change in Bank Control Act of 1978 to acquire or retain 10% or more of our outstanding common stock. Becoming a bank holding company imposes certain statutory and regulatory restrictions and burdens, and might require the holder to divest all or a portion of the holder s investment in our common stock. In addition, because a bank holding company is required to provide managerial and financial strength for its bank subsidiary, such a holder may be required to divest investments that may be deemed incompatible with bank holding company status, such as a material investment in a company unrelated to banking. Further, subject to an FDIC policy statement published in August 2009, under certain circumstances, holders of 5% or more of our securities could be required to be subject to certain restrictions, such as an inability to sell or trade their securities for a period of three years, among others, in order for us to participate in an FDIC-assisted transaction of a failed bank. Table of Contents

parsed_sections/risk_factors/2010/CIK0000708717_tamir_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock is speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus and our other SEC filings before deciding whether to purchase shares of our common stock. If any of the following risks actually occur, our business and operating results could be harmed. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment. Risks related to the Development of our Product Candidates We are highly dependent on achieving success in the clinical testing, regulatory approval and commercialization of ONCONASE , and our other compounds currently under development. If we fail to obtain the necessary regulatory approvals, we will not be allowed to commercialize ONCONASE and our business will be harmed. The Food and Drug Administration, or FDA, in the United States and comparable regulatory agencies in foreign countries impose substantial pre-market approval requirements on the introduction of pharmaceutical products. These requirements involve the completion of lengthy and detailed pre-clinical and clinical testing and other costly and time consuming procedures. Satisfaction of these requirements typically takes several years depending on the level of complexity and novelty of the product. The length of time required to complete a clinical trial depends on several factors including the size of the patient population, the ability of patients to get to the site of the clinical study, and the criteria for determining which patients are eligible to join the study. A significant portion of our expenditures have been devoted and, in the future will be devoted, to the clinical trials for our lead product candidate, ONCONASE . Although the financing we received in October 2009 will enable us to commence a new clinical trial for ONCONASE , we will be required to obtain additional financing to complete this trial and pursue the further development of ONCONASE . Such financing may not be available, and even if it is available, it may not be available on terms favorable or acceptable to us. All statutes and regulations governing the conduct of clinical trials are subject to future changes by various regulatory agencies, including the FDA, which could affect the cost and duration of our clinical trials. Any unanticipated costs or delays in our clinical studies would delay our ability to generate product revenues and to raise additional capital and could cause us to be unable to fund the completion of the studies. We may not market or sell any product for which we have not obtained regulatory approval. We cannot assure you that the FDA or other regulatory agencies will ever approve the use of our products that are under development. Even if we receive regulatory approval, such approval may involve limitations on the indicated uses for which we may market our products. Further, even after approval, discovery of previously unknown problems could result in additional restrictions, including withdrawal of our products from the market. If we fail to obtain the necessary regulatory approvals, we cannot market or sell our products in the United States or in other countries and our viability would be threatened. If we fail to achieve regulatory approval or foreign marketing authorizations for ONCONASE we will not have a product suitable for sale or product revenues and may not be able to continue operations. Our profitability will depend on our ability to develop, obtain regulatory approvals for, and effectively market ONCONASE as well as entering into strategic alliances for the development of new drug candidates from the out-licensing of our proprietary RNase technology. The commercialization of our pharmaceutical products involves a number of significant challenges. In particular, our ability to commercialize ONCONASE depends on the success of our clinical development programs, our efforts to obtain regulatory approval and our sales and marketing efforts or those of our marketing partners, directed at physicians, patients and third-party payors. A number of factors could affect these efforts including our ability to demonstrate clinically that our products are effective and safe; delays or refusals by regulatory authorities in granting marketing approvals; our limited financial resources relative to our competitors; our ability to obtain and maintain relationships with current and additional marketing partners; the availability and level of reimbursement for our products by third party payors; incidents of adverse reactions to our products; misuse of our products and unfavorable publicity that could result; and the occurrence of manufacturing or distribution disruptions. During the quarter ended January 31, 2008, we issued 200,000, 65,000 and 35,000 shares to McCash Family Limited Partnership, Donna McCash Irrevocable Trust and an unrelated private party, respectively, upon the exercise of warrants at an exercise price ranging from $0.60 to $1.00 per share, which resulted in gross proceeds of $194,000. We have previously registered the resale of these shares by the stockholders on a Form S-3 registration statement. The above transactions with the McCash Family Limited Partnership and Donna McCash Irrevocable Trust, who are accredited investors as such term is defined under Regulation D of the Securities Act, were exempt from registrations under Section 4(2) of the Securities Act. We did not engage in any public advertising or general solicitation in connection with the either the issuance or exercise of the above warrants. The net proceeds from these transactions were used for general corporate purposes. During the quarter ended April 30, 2008, we issued 100,000 shares to McCash Revocable Trust upon the exercise of warrants at an exercise price of $0.60 per share, which resulted in gross proceeds of $60,000. This transaction was exempt from registrations under Section 4(2) of the Securities Act of 1933, as amended. We have previously registered the resale of these shares by the stockholders on a Form S-3 registration statement. We did not engage in any public advertising or general solicitation in connection with the either the issuance or exercise of the above warrants. The net proceeds from these transactions were used for general corporate purposes. On October 19, 2009, we completed a sale of 65 Units in a private financing to certain investors pursuant to the Securities Purchase Agreement entered into on October 19, 2009. Each Unit consists of (i) $50,000 principal amount of Notes convertible into shares of the Company s common stock at a price of $0.15 per share, (ii) Series A Warrants to purchase in the aggregate that number of shares of common stock initially issuable upon conversion of the aggregate amount of the Notes issued as part of the Unit, at an exercise price of $0.15 per share with a three year term and (iii) Series B Warrants to purchase in the aggregate that number of shares of common stock initially issuable upon conversion of the aggregate amount of the Notes issued as part of the Unit, at an exercise price of $0.25 per share with a five year term. We received an aggregate of $3,250,000 in gross proceeds from the private financing. We did not engage in any public advertising or general solicitation in connection with the either the issuance or exercise of the above warrants. The securities were offered pursuant to the exemptions from registration set forth in section 4(2) of the Securities Act and Regulation D promulgated thereunder. The net proceeds from these transactions were used for general corporate purposes. Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following exhibits are filed herewith or incorporated by reference into this Form S-1: Exhibit No. Item Title Filed Herewith or Incorporated by Reference 3.1 Certificate of Incorporation, dated June 12, 1981 (incorporated by reference to Exhibit 3.1 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 3.2 Amendment to Certificate of Incorporation, dated February 18, 1994 (incorporated by reference to Exhibit 3.2 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 3.3 Amendment to Certificate of Incorporation, dated December 26, 1997 (incorporated by reference to Exhibit 3.3 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 3.4 Amendment to Certificate of Incorporation, dated January 14, 2004 (incorporated by reference to Exhibit 3.4 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 3.5 Certificate of Designation for Series A Preferred Stock, dated September 2, 2003 (incorporated by reference to Exhibit 3.5 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * Based upon guidance provided by the FDA at a pre-NDA meeting, we decided not to file a new drug application (NDA) for ONCONASE for unresectable malignant mesothelioma (UMM) and to not pursue further clinical trials of ONCONASE for the treatment of UMM. The results of the preliminary statistical analysis of the data from the confirmatory Phase IIIb clinical trial we conducted for ONCONASE in patients suffering from UMM did not meet statistical significance for the primary endpoint of survival in UMM. Although a statistically significant improvement in survival was seen in the treatment of UMM patients who failed one prior chemotherapy regimen, a pre-defined primary data set for this sub-group of patients in the trial, at a pre-NDA meeting with the FDA held in January 2009, the FDA recommended that an additional clinical trial be conducted in this sub-group of patients prior to our submitting an NDA for ONCONASE . Based upon our assessment that it would be difficult to design and conduct a clinical trial that would comply with the FDA s recommendation and allow us to file an NDA, we have determined at this time not to pursue further clinical trials for the treatment of UMM. Based upon the results of certain preclinical testing performed on ONCONASE we have decided to pursue a Phase II clinical trial for ONCONASE for the treatment of non-small cell lung cancer in patients who have reached maximum progression on their current chemotherapy regimens. Although the financing we received in October 2009 will enable us to initiate this Phase II clinical trial, we will be required to obtain additional financing to complete this clinical trial and pursue further development of ONCONASE . We cannot assure you that we will be able to commence or complete the new Phase II clinical trial for ONCONASE , or that the results from this clinical trial will be positive. Even if the results from this Phase II clinical trial are positive, we cannot assure you that the results of subsequent Phase III clinical trials will be positive or will support marketing approval of ONCONASE in the United States or in any other jurisdictions. Budget constraints may force us to delay our efforts to develop certain drug product candidates in favor of developing others, which may prevent us from commercializing all drug product candidates as quickly as possible. Because we are an emerging company with limited resources, and because developing new drug product candidates is an expensive process, we must regularly assess the most efficient allocation of our research and development budget. As a result, we may have to further prioritize development activities and may not be able to fully realize the value of some of our drug product candidates in a timely manner, and they may be delayed in reaching the market, if at all. A reduction in spending on our other drug product candidates could delay our commercialization efforts and negatively impact our ability to diversify our development risk across a broad portfolio of drug product candidates. Risks Related to Our Financial Position and Need for Additional Capital We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future. We do not have a current source of product revenue and may never be profitable. We are a development stage company and since our inception one of the principal sources of our working capital has been private sales of our common stock. Over the past three fiscal years, we have incurred aggregate net losses of approximately $25.6 million and since our inception we have incurred aggregate net losses of approximately $108.9 million. We expect to incur additional losses and, as our development efforts, efforts to file an NDA for ONCONASE and clinical testing activities continue, our rate of losses may increase. We also expect to experience negative cash flows for the foreseeable future as we fund our losses and capital expenditures. Our losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and stockholders equity. To date, we have not sold or received approval to sell any drug product candidates, and it is possible that revenues from drug product sales will never be achieved. We cannot at this time predict when or if we will be able to develop other sources of revenue or when or if our operations will become profitable, even if we are able to commercialize some of our drug product candidates. 3.6 Certificate of Elimination of Series A Preferred Stock, dated February 3, 2004 (incorporated by reference to Exhibit 3.6 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 3.7 Certificate of Amendment to Certificate of Incorporation, dated April 27, 2010 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on April 30, 2010) * 3.8 By-Laws (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-1, File No. 333-111101, filed on December 11, 2003) * 4.1 Form of 5% Senior Secured Convertible Promissory Notes dated October 19, 2009 (incorporated by reference to Exhibit 4.1 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * 4.2 Amendment to each 5% Senior Secured Convertible Promissory Notes dated February 26, 2010 by and among the Company and the holders thereof (incorporated by reference to Exhibit 10.2 to the Company s Current Report on Form 8-K, filed on March 4, 2010) 4.3 Form of Series A Common Stock Purchase Warrant dated October 19, 2010 (incorporated by reference to Exhibit 4.2 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * 4.4 Form of Series B Common Stock Purchase Warrant dated October 19, 2010 (incorporated by reference to Exhibit 4.3 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * 5.1 Legality Opinion of Goodwin Procter LLP + 10.1 1993 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.10 to Registration Statement on Form SB-2, File No. 33-76950, filed on August 1, 1994) * 10.2 1997 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1, File No. 333-111101, filed on December 11, 2003) * 10.2.1 Amendment No. 1 to 1997 Stock Option Plan (incorporated by reference to Exhibit 10.2.1 to the Company s Quarterly Report on Form 10-Q, filed on June 9, 2008) * 10.3 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company s Registration Statement on Form S-1, File No. 333-112865, filed on February 17, 2004) * 10.3.1 Amendment No. 1 to 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3.1 to the Company s Quarterly Report on Form 10-Q, filed on June 9, 2008) * 10.4 Form of Subscription Agreement and Warrant Agreement used in Private Placements completed in February 2000 (incorporated by reference to Exhibit 10.21 to the Company s Annual Report on Form 10-K, filed on October 30, 2000) * 10.5 Form of Subscription Agreement and Warrant Agreement used in the August and September 2000 Private Placements (incorporated by reference to Exhibit 10.24 to the Company s Quarterly Report on Form 10-Q, filed on December 15, 2000) * 10.6 Form of Subscription Agreement and Warrant Agreement used in the April 2001 Private Placements (incorporated by reference to Exhibit 10.23 to Registration Statement on Form S-1, File No. 333-38136, filed on July 30, 2001) * 10.7 Form of Convertible Note entered into in April 2001 (incorporated by reference to Exhibit 10.24 to Registration Statement on Form S-1, File No. 333-38136, filed on July 30, 2001) * We will seek to generate revenue through licensing, marketing and development arrangements prior to receiving revenue from the sale of our products. Currently, we are party to four non-US regional marketing and distribution agreements and we may not be able to successfully negotiate any additional agreements. In the past, we have entered into several development arrangements which have resulted in limited revenues for us. We cannot assure investors that these arrangements or future arrangements, if any, will result in significant amounts of revenue for us in the future. We, therefore, are unable to predict the extent of any future losses or the time required to achieve profitability, if at all. We will need additional financing to continue operations, which may not be available on favorable or acceptable terms, if it is available at all. Based upon our current operations and our plans for a Phase II clinical trial for ONCONASE for the treatment of non-small cell lung cancer in patients who have reached maximum progression on their current chemotherapy regimens, we expect that our current cash reserves should be sufficient to support our activities through July 2010. Although our current cash reserves will enable to initiate this Phase II clinical trial, provided we obtain the required approval from the FDA, we will need to obtain additional financing to complete the clinical trial and pursue further development of ONCONASE . As a result of our continuing losses and lack of capital, the report of our independent registered public accounting firm on our July 31, 2009 audited financial statements included an explanatory paragraph which states that our recurring losses from operations and negative cash flows from operating activities raise substantial doubt about our ability to continue as a going concern. Our financial statements at July 31, 2009 do not include any adjustments that might result from the outcome of this uncertainty. We will need additional financing to conduct our business after July 2010. Factors that would affect our ability to obtain capital in the future and the amount and timing of additional capital required include, but are not limited to, the following: the condition of the capital markets in general and the willingness of investors to invest in development stage biotech companies, in particular; the progress and cost of research and development and clinical trial activities relating to our drug product candidates; the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our patent claims and other intellectual property rights and investigating and defending against infringement claims asserted against us by others; the emergence of competing technologies and other adverse market developments; changes in or terminations of our existing licensing, marketing and distribution arrangements; the amount of milestone payments we may receive from current and future collaborators, if any; and the cost of manufacturing scale-up and development of marketing operations, if we undertake those activities. our degree of success in commercializing our drug product candidates, including entering into additional marketing and distribution agreements; our ability to obtain marketing approval of our product candidates Additional financing may not be available when we need it or be on terms acceptable to us. If adequate financing is not available or we are unable to conclude a strategic transaction prior to the time our current cash reserves are exhausted we will be required to cease operations. If additional capital is raised through the sale of equity, our stockholders ownership interest could be diluted and such newly-issued securities may have rights, preferences, or privileges superior to those of our other stockholders. The terms of any debt securities we may sell to raise additional capital may place restrictions on our operating activities. We will need additional capital in the future and the Notes may make it more difficult for us to obtain the needed capital. We will need to obtain additional financing over time to fund our operations. The security interest in all of our assets which secures our obligations under the Notes, the covenants in the Notes, the conversion terms of the Notes and the exercise terms of the Warrants issued with the Notes could make it difficult for us to obtain needed financing or could result in our obtaining financing with unfavorable terms. Our failure to obtain financing or obtaining financing on unattractive terms could have a material adverse effect on our business. 10.8 Form of Subscription Agreement and Warrant Agreement used in the July 2001 Private Placements (incorporated by reference to Exhibit 10.25 to Registration Statement on Form S-1, File No. 333-38136, filed on July 30, 2001) * 10.9 Form of Subscription Agreement and Warrant Agreement used in the August and October 2001 private placement (incorporated by reference to Exhibit 10.26 to Registration Statement on Form S-1, File No. 333-38136, filed on December 14, 2001) * 10.10 Form of Subscription Agreement and Warrant Agreement used in the September 2001, November 2001 and January 2002 private placements (incorporated by reference to Exhibit 10.27 to Registration Statement on Form S-1, File No. 333-38136, filed on February 21, 2002) * 10.11 Warrant issued in the February 2002 private placement (incorporated by reference to Exhibit 10.28 to Registration Statement on Form S-1, File No. 333-38136, filed on February 21, 2002) * 10.12 Form of Subscription Agreement and Warrant Agreement used in the March 2002, April 2002 and May 2002 private placements (incorporated by reference to Exhibit 10.29 to Registration Statement on Form S-1, File No. 333-89166, filed on May 24, 2002) * 10.13 Form of Subscription Agreement and Warrant Agreement used in the June 2002 and October 2002 private placements (incorporated by reference to Exhibit 10.30 to the Post-Effective Amendment to Registration Statement on Form S-1, File No. 333-38136, filed on March 3, 2003) * 10.14 Form of Note Payable and Warrant Certificate entered into April, June, July, September, November and December 2002 (incorporated by reference to Exhibit 10.31 to the Post-Effective Amendment to Registration Statement on Form S-1, File No. 333-38136, filed on March 3, 2003) * 10.15 Form of Note Payable and Warrant Certificate entered into November 2001, January, March and May 2003 (incorporated by reference to Exhibit 10.23 to the Company s Annual Report on Form 10-K, filed on October 29, 2003) * 10.16 Form of Subscription Agreement and Warrant Agreement used in the February 2003 and April through August 2003 private placements (incorporated by reference to Exhibit 10.24 to the Company s Annual Report on Form 10-K, filed on October 29, 2003) * 10.17 Form of Amended Notes Payable which amends the November 2001, April 2002, June 2002, July 2002, September 2002, November 2002 December 2002, January 2003, March 2003 and May 2003 notes payable (incorporated by reference to Exhibit 10.27 to The Company s Annual Report on Form 10-K, filed on October 29, 2003) * 10.18 Securities Purchase Agreement and Warrant Agreement used in September 2003 private placement and Form of Warrant Certificate issued on January 16, 2004 and January 29, 2004 to SF Capital Partners Ltd. (incorporated by reference to Exhibit 10.25 to the Company s Annual Report on Form 10-K, filed on October 29, 2003) * 10.19 Registration Rights Agreement used in September 2003 private placement with SF Capital Partners Ltd. (incorporated by reference to Exhibit 10.26 to the Company s Annual Report on Form 10-K, filed on October 29, 2003) * 10.20 Form of Securities Purchase Agreement used in May 2004 private placement with Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis Kalista JTWROS (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1, File No. 333-112865, filed on May 18, 2004) * 10.21 Form of Registration Rights Agreement used in May 2004 private placement with Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis Kalista JTWROS (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-1, File No. 333-112865, filed on May 18, 2004) * Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement A portion of the proceeds received pursuant to our October 2009 private financing were placed in an escrow account, and pursuant to the terms of an escrow agreement governing the escrow account may only be used for certain limited purposes. In connection with our October 2009 private financing, we entered into an escrow agreement whereby certain investors placed $1.6 million of the proceeds paid for their units purchased in the financing in an escrow account. The escrow agreement shall terminate on the earlier of the date that all funds have been disbursed from the escrow account and April 19, 2011, at which time any remaining funds will be disbursed to us. Such amounts can be disbursed from the escrow account only to satisfy obligations of ours owed to clinical research organizations, hospitals, doctors and other vendors and service providers associated with the clinical trials which we intend to conduct for our ONCONASE product. Until such time that the escrow agreement terminates, we are not permitted to use the funds in the escrow account for any other purposes. We face certain litigation risks, and unfavorable results of legal proceedings could have a material adverse effect on us. As described under the heading LEGAL PROCEEDINGS of this Registration Statement on Form S-1, we are a party to certain lawsuits. Regardless of the merits of any claim, litigation can be lengthy, time-consuming, expensive, and disruptive to normal business operations and may divert management s time and resources, which may have a material adverse effect on our business, financial condition and results of operations, including our cash flow. The results of complex legal proceedings are difficult to predict. Should we fail to prevail in these matters, or should any of these matters be resolved against us, we may be faced with significant monetary damages, which also could materially adversely affect our business, financial condition and results of operations, including our cash flow. In addition, we may incur higher general and administrative expenses than we have in the past in order to defend and prosecute this litigation, which could adversely affect our operating results. The ability of our stockholders to recover against Armus Harrison & Co., or AHC, may be limited because we have not been able to obtain the reissued reports of AHC with respect to the financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2009, nor have we been able to obtain AHC s consent to the use of such report herein. Section 18 of the Securities Exchange Act of 1934, or Exchange Act, provides that any person acquiring or selling a security in reliance upon statements set forth in a Form 10-K may assert a claim against every accountant who has with its consent been named as having prepared or certified any part of the Form 10-K, or as having prepared or certified any report or valuation that is used in connection with the Form 10-K, if that part of the Form 10-K at the time it is filed contains a false or misleading statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading (unless it is proved that at the time of such acquisition such acquiring person knew of such untruth or omission). In June 1996, AHC dissolved and ceased all operations. Therefore, we have not been able to obtain the reissued reports of AHC with respect to the financial statements included in the Annual Report on Form 10-K for the fiscal year ended July 31, 2009 nor have we been able to obtain AHC s consent to the use of such report herein. As a result, in the event any persons seek to assert a claim against AHC under Section 18 of the Exchange Act for any untrue statement of a material fact contained in these financial statements or any omissions to state a material fact required to be stated therein, such persons will be barred. Accordingly, you may be unable to assert a claim against AHC under Section 18 of the Exchange Act for any purchases of the Company s common stock made in reliance upon statements set forth in our Annual Report on Form 10-K for the fiscal year ended July 31, 2009. In addition, the ability of AHC to satisfy any claims properly brought against it may be limited as a practical matter due to AHC s dissolution in 1996. Our investments could lose market value and consequently harm our ability to fund continuing operations. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash and cash equivalents in a variety of securities, including government and corporate obligations and money market funds. The market values of these investments may fluctuate due to market conditions and other conditions over which we have no control. Fluctuations in the market price and valuations of these securities may require us to record losses due to impairment in the value of the securities underlying our investment. This could result in future charges to our earnings. All of our investment securities are denominated in US dollars. 10.22 Form of Warrant Certificate issued on May 11, 2004 to Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis Kalista JTWROS (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-1, File No. 333-112865, filed on May 18, 2004) * 10.23 Form of Stock Option Agreement issued to the Company s Board of Directors under the Company s 1997 Stock Option Plan (incorporated by reference to Exhibit 10.23 to the Company s Quarterly Report on Form 10-Q filed on June 9, 2005) * 10.24 Form of Stock Option Agreement issued to the Company s Executive Officers under the Company s 1997 Stock Option Plan (incorporated by reference to Exhibit 10.24 to the Company s Quarterly Report on Form 10-Q, filed on June 9, 2005) * 10.25 Separation Agreement and General Release with Andrew Savadelis dated May 26, 2005 (incorporated by reference to Exhibit 10.25 to the Company s Annual Report on Form 10-K, filed on October 15, 2005) * 10.26 Securities Purchase Agreement used in May 2005 private placement with Jeffrey D Onofrio dated May 1, 2006 (incorporated by reference to Exhibit 10.26 to the Company s Annual Report on Form 10-K, filed on October 16, 2006) * 10.27 Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.28 Registration Rights Agreement dated July 17, 2006 (incorporated by reference to Exhibit 4.2 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.29 Agreement to Amend Knoll Warrant dated July 17, 2006 (incorporated by reference to Exhibit 4.3 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.30 Form of Amended Knoll Warrant (incorporated by reference to Exhibit 4.4 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.31 Agreement to Amend SF Capital Warrant dated July 17, 2006 (incorporated by reference to Exhibit 4.5 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.32 Form of Amended Warrant for SF Capital Partners, Ltd. (incorporated by reference to Exhibit 4.6 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.33 Securities Purchase Agreement dated July 17, 2006 (incorporated by reference to Exhibit 10.1 to the Company s Current Report on Form 8-K, filed on July 19, 2006) * 10.34 Form of Stock Option Agreement for Executive Officers under the Company s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.34 to the Company s Quarterly Report on Form 10-Q, filed on March 12, 2007) * 10.35 Offer letter agreement with Lawrence A. Kenyon dated January 16, 2007 (incorporated by reference to Exhibit 10.35 to the Company s Quarterly Report on Form 10-Q, filed on March 12, 2007) * 10.36 Summary of the Company s Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.36 to the Company s Quarterly Report on Form 10-Q, filed on March 12, 2007) * Investments in both fixed-rate and floating-rate interest earning instruments carry varying degrees of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. While floating-rate securities generally are subject to less interest rate risk than fixed-rate securities, floating-rate securities may produce less income than expected if interest rates decrease. Due in part to these factors, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates. Risks Related to the Commercialization of our Product Candidates Our product candidates may not be accepted by the market. Even if approved by the FDA and other regulatory authorities, our product candidates may not achieve market acceptance, which means we would not receive significant revenues from these products. Approval by the FDA does not necessarily mean that the medical community will be convinced of the relative safety, efficacy and cost-effectiveness of our products as compared to other products. In addition, third party reimbursers such as insurance companies and HMOs may be reluctant to reimburse expenses relating to our products. We are and will be dependent upon third parties for manufacturing our products. If these third parties do not devote sufficient time and resources to our products our revenues and profits may be adversely affected. We do not have the required manufacturing facilities to manufacture our product. We presently rely on third parties to produce ONCONASE for use in clinical trials. We have entered into a ten-year purchase and supply agreement with SPL, for the manufacturing of ranpirnase (protein drug substance) from the oocytes, or the unfertilized eggs, of the Rana pipiens frog, which is found in the Northwest United States and is commonly called the leopard frog. Additionally, we contract with Ben Venue for the manufacturing of ONCONASE and with Bilcare, Catalent and Aptuit for the storage, labeling and shipping of ONCONASE for clinical trial use. We utilize the services of these third party manufacturers solely on an as needed basis with terms and prices customary for our industry. We use FDA CGMP licensed manufacturers for ranpirnase and ONCONASE . We have identified alternative providers for the manufacturing services for which we may contract. In order to replace an existing service provider we must amend the Investigational New Drug Application (IND) for our Product Candidate to notify the FDA of the new manufacturer. Although the FDA generally will not suspend or delay a clinical trial as a result of replacing an existing manufacturer, the FDA has the authority to suspend or delay a clinical trial if, among other grounds, human subjects are or would be exposed to an unreasonable and significant risk of illness or injury as a result of the replacement manufacturer. We intend to rely on third parties to manufacture our products if they are approved for sale by the appropriate regulatory agencies and are commercialized. Third party manufacturers may not be able to meet our needs with respect to the timing, quantity or quality of our products or to supply products on acceptable terms. Because we do not have in-house marketing, sales or distribution capabilities, we have contracted with third parties and expect to contract with third parties in the future for these functions and we will therefore be dependent upon such third parties to market, sell and distribute our products in an effort to generate revenues. We currently have no in-house sales, marketing or distribution capabilities. In order to commercialize any product candidates for which we receive FDA or non-U.S. approval, we expect to rely on established third parties who have strategic partnerships with us to perform these functions. To date, we have entered into four marketing and distribution agreements for ONCONASE in regions outside the United States. We cannot assure you we will be able to maintain these relationships or establish new relationships with biopharmaceutical or other marketing companies with existing distribution systems and direct sales forces to market any or all of our product candidates on acceptable terms, if at all. 10.37 Royalty Agreement between the Company and Kuslima Shogen, dated July 24, 1991 and Amendment to Royalty Agreement, dated April 16, 2001 (incorporated by reference to Exhibit 10.37 to the Company s Quarterly Report on Form 10-Q, filed on March 12, 2007) * 10.38 Office Lease Agreement, dated March 14, 2007, between I&G Garden State, LLC and the Company (incorporated by reference to Exhibit 10.38 to the Company s Quarterly Report on Form 10-Q, filed on June 18, 2007) * 10.39 Form of Distribution and Marketing Agreement, dated July 25, 2007, between the Company and USP Pharma Spolka Z.O.O. (incorporated by reference to Exhibit 10.39 to the Company s Quarterly Report on Form 10-Q, filed on October 15, 2007) *^ 10.40 Form of Securities Purchase Agreement, dated July 25, 2007, between the Company and Unilab LP. (incorporated by reference to Exhibit 10.40 to the Company s Quarterly Report on Form 10-Q, filed on October 15, 2007) * 10.41 License Agreement, dated January 14, 2008, between the Company and Par Pharmaceutical, Inc. (incorporated by reference to Exhibit 10.41 to the Company s Quarterly Report on Form 10-Q, filed on March 7, 2008) *^ 10.42 Supply Agreement, dated January 14, 2008, between the Company and Par Pharmaceutical, Inc. (incorporated by reference to Exhibit 10.42 to the Company s Quarterly Report on Form 10-Q, filed on March 7, 2008) * 10.43 Purchase and Supply Agreement, dated January 14, 2008, between the Company and Scientific Protein Laboratories LLC (incorporated by reference to Exhibit 10.43 to the Company s Quarterly Report on Form 10-Q, filed on March 7, 2008) * 10.44 Amendment No. 1 to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.44 to the Company s Quarterly Report on Form 10-Q, filed on June 9, 2008) * 10.45 Retirement Agreement, dated April 25, 2008, between the Company and Kuslima Shogen (incorporated by reference to Exhibit 99.1 to the Company s Current Report on Form 8-K, filed on April 28, 2008) *~ 10.46 Securities Purchase Agreement dated October 19, 2009 by and among the Company and the investors named therein (incorporated by reference to Exhibit 10.1 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * 10.47 Amendment to Securities Purchase Agreement dated February 26, 2010 by and among the Company and the investors named therein (incorporated by reference to Exhibit 10.1 to the Company s Current Report on Form 8-K, filed on March 4, 2010) * 10.48 Investors Rights Agreement dated October 19, 2009 by and among the Company and the investors named therein (incorporated by reference to Exhibit 10.2 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * 10.49 Amendment to Investor Rights Agreement dated February 26, 2010 by and among the Company and the investors named therein (incorporated by reference to Exhibit 10.3 to the Company s Current Report on Form 8-K, filed on March 4, 2010) * 10.50 Security Agreement dated October 19, 2009 by and among the Company, the agent named therein and the secured parties named therein (incorporated by reference to Exhibit 10.3 to the Company s Current Report on Form 8-K, filed on October 20, 2009) * If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /x/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box. / / If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box. / / Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of large accelerated filer, accelerated filer, and small reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer / / Accelerated filer / / Non-accelerated filer / / (Do not check if a smaller reporting company) Smaller reporting company /x/ CALCULATION OF REGISTRATION FEE Proposed Maximum Proposed Maximum Amount of Title of Each Class of Offering Price Aggregate Offering Registration Securities to be Registered Amount to be Registered(1) per Share Price Fee(5) Common Stock issuable upon conversion of notes 24,916,667 (2) $0.24 (3) $ 5,980,000 $426.37 Common Stock issuable upon exercise of Series A warrants, execrable at $0.15 per share. 21,666,664 $0.24 (4) $5,199,999 $370.76 Common Stock issuable upon exercise of Series B warrants, execrable at $0.25 per share 21,666,664 $0.25 (4) $5,416,666 $386.21 (1) We are registering the resale of shares of common stock by Selling Security Holders that we will issue to the Selling Security Holders upon the conversion of the notes and exercise of the warrants, which were issued to the Selling Security Holders as a result of private placements we completed in October 2009. Pursuant to Rule 416 under the Securities Act, this registration statement also covers such additional shares of common stock as may hereafter be offered or issued with respect to the shares being registered hereby as a result of stock splits, stock dividends, recapitalization or similar adjustments. (2) Assume the accrual of three years interest at a rate of 5% on the principal of the notes and the payment of such accrued interest with shares of common stock upon the maturity date of the notes. (3) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) under the Securities Act. We have estimated the offering price to be $0.24 per share based on the average of the high and low sales prices of the registrant s common stock as reported on the Pink Sheets market on April 26, 2010. (4) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(g) under the Securities Act. Represents the higher of: (a) the exercise price of the warrants and (b) the offering price of the securities of the same class as the common stock underlying the warrants calculated in accordance with Rule 457(c). (5) Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. In addition, we may incur significant expenses in determining our commercialization strategy with respect to one or more of our product candidates for regions outside the United States. The determination of our commercialization strategy with respect to a product candidate will depend on a number of factors, including: the extent to which we are successful in securing third parties to collaborate with us to offset some or all of the funding obligations with respect to product candidates; the extent to which our agreement with our collaborators permits us to exercise marketing or promotion rights with respect to the product candidate; how our product candidates compare to competitive products with respect to labeling, pricing, therapeutic effect, and method of delivery; and whether we are able to establish agreements with third party collaborators, including large biopharmaceutical or other marketing companies, with respect to any of our product candidates on terms that are acceptable to us. If we are unable to obtain favorable reimbursement for our product candidates, their commercial success may be severely hindered. Our ability to sell our future products may depend in large part on the extent to which reimbursement for the costs of our products is available from government entities, private health insurers, managed care organizations and others. Third-party payors are increasingly attempting to contain their costs. We cannot predict what actions third-party payors may take, or whether they will limit the coverage and level of reimbursement for our products or refuse to provide any coverage at all. Reduced or partial reimbursement coverage could make our products less attractive to patients, suppliers and prescribing physicians and may not be adequate for us to maintain price levels sufficient to realize an appropriate return on our investment in our product candidates or to compete on price. In some cases, insurers and other healthcare payment organizations try to encourage the use of less expensive generic brands and over-the-counter, or OTC, products through their prescription benefits coverage and reimbursement policies. These organizations may make the generic alternative more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic product to the patient is less than the net cost of a prescription brand product. Aggressive pricing policies by our generic product competitors and the prescription benefits policies of insurers could have a negative effect on our product revenues and profitability. Many managed care organizations negotiate the price of medical services and products and develop formularies for that purpose. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic or OTC products, our market share and gross margins could be negatively affected, as could our overall business and financial condition. The competition among pharmaceutical companies to have their products approved for reimbursement may also result in downward pricing pressure in the industry or in the markets where our products will compete. We may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products. Any decline in our average selling prices would also reduce our gross margins. In addition, managed care initiatives to control costs may influence primary care physicians to refer fewer patients to oncologists and other specialists. Reductions in these referrals could have a material adverse effect on the size of our potential market and increase costs to effectively promote our products. We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital. 10.51 Escrow Agreement by and among the Company and the parties named therein dated October 19, 2009 (incorporated by reference to Exhibit 10.4 to the Company s Current Report 8-K, filed on October 20, 2009) * 10.52 Employment Agreement by and between the Company and Charles Muniz dated October 19, 2009 (incorporated by reference to Exhibit 10.5 to the Company s Current Report on Form 8-K, filed on October 20, 2009) *~ 10.53 Termination Agreement between the Company and Par Pharmaceutical, Inc. (incorporated by reference to Exhibit 10.51 to the Company s Quarterly Report on Form 10-Q, filed on November 13, 2009) * 10.54 Amendment to the Retirement Agreement, dated April 25, 2008, between the Company and Kuslima Shogen (incorporated by reference to Exhibit 10.52 to the Company s Quarterly Report on Form 10-Q, filed on November 13, 2009) * 21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21. to the Company s Annual Report on Form 10-K, filed on October 16, 2006) * 23.1 Consent of J.H. Cohn LLP + 23.2 Consent of KPMG LLP + 23.3 Consent of Goodwin Procter LLP (See Exhibit 5.1) + * Previously filed; incorporated herein by reference + Filed herewith ^ Portions of this exhibit have been redacted and filed separately with the SEC pursuant to a confidential treatment request. ~ Management contract or compensatory plan or arrangement. SUBJECT TO COMPLETION, DATED ____________, 2010 TAMIR BIOTECHNOLOGY, INC. 68,249,995 shares of Common Stock This prospectus relates to the offer for sale of up to 68,249,995 shares of our common stock by certain existing holders of the securities, referred to as Selling Security Holders throughout this document. Each of the Selling Security Holders will receive all of the net proceeds from the sale of shares by that holder. We will not receive any of the proceeds of this offering. On April 27, 2010, our stockholders approved an amendment to our certificate of incorporation which changed our name from Alfacell Corporation to Tamir Biotechnology, Inc. This amendment to our certificate of incorporation had been previously approved by our board of directors and was filed with the State of Delaware on April 27, 2010. Our common stock is traded on the Pink Sheets market and prices are quoted under the symbol ACEL . On April 26, 2010, the last reported price was $0.25. Investing in our stock involves substantial risks. See Risk Factors beginning on page 3. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this Prospectus is _________, 2010 The information in this prospectus is not complete and may be changed. The Selling Security Holders will not sell these securities until after the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. These include the Affordable Health Care for America Act, recently passed by the United States Congress and singed into law by the President and the Prescription Drug and Medicare Improvement Act of 2003. Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that current legislation, as well as legislation that may be adopted in the future, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to market our products and generate revenues. As a result of current legislation, as well as legislation that may be adopted in the future, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could harm our ability to operate our business efficiently, obtain collaborators and raise capital. Competition in the biopharmaceutical field is intense and subject to rapid technological change. Our principal competitors have substantially greater resources to develop and market products that may be superior to ours. If we obtain regulatory approval for any of our drug product candidates, the extent to which they achieve market acceptance will depend, in part, on competitive factors. Competition in our industry is intense, and it is increased by the rapid pace of technological development. Existing drug products or new drug products developed by our competitors may be more effective or have fewer side effects, or may be more effectively marketed and sold, than any that we may develop. Our principal competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial, and managerial resources than we do. Competitive drug compounds may render our technology and drug product candidates obsolete or noncompetitive prior to our recovery of research, development, or commercialization expenses incurred through sales of any of our drug product candidates. The FDA s policy of granting fast track approval for cancer therapies may also expedite the regulatory approval of our competitors drug product candidates. To our knowledge, no other company is developing a product with the same mechanism of action as ONCONASE . However, there may be other companies, universities, research teams or scientists who are developing products to treat the same medical conditions our products are intended to treat. We also compete with other drug development companies for collaborations with large pharmaceutical and other companies. Risks Related to this Offering and the Market for our Common Stock Our stock price has been and is likely to continue to be volatile, and an investment in our common stock could decline in value. The market price of our common stock, like that of the securities of many other development stage biotechnology companies, has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future. For example, over our past three fiscal years, the sale price for our common stock has fluctuated from a low of $0.06 to a high of $4.29. The market price of our common stock could be impacted by a variety of factors, including: the success or failure of our clinical trials or those of our competitors; announcements of technological innovations or new drug products by us or our competitors; Actual or anticipated fluctuations in our financial results; our ability to obtain financing, when needed; economic conditions in the United States and abroad; Comments by or changes in our assessments or financial estimates by securities analysts; adverse regulatory actions or decisions; Losses of key management; changing governmental regulations; our ability to secure adequate third party reimbursement for products developed by us; developments or disputes concerning patents or other proprietary rights; product or patent litigation; and Public concern as to the safety of products developed by us. Item 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (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% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. (5) For purposes of determining any liability under the Securities Act, if the registrant is subject to Rule 430C under the Securities Act, each prospectus filed pursuant to Rule 424(b) under the Securities Act as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B under the Securities Act or other than prospectuses filed in reliance on Rule 430A under the Securities Act, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. The stock market continues to experience extreme price and volume fluctuations and these fluctuations have especially affected the market price of many biotechnology companies. Such fluctuations have often been unrelated to the operating performance of these companies. Volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options. These factors and fluctuations, as well as political and market conditions, may materially adversely affect the market price of our common stock. A few significant stockholders control the direction of our business. If the ownership of our common stock continues to be highly concentrated, it will prevent other shareholders from influencing significant corporate actions. The ability of other shareholders to influence corporate matters may be limited because a small number of stockholders beneficially currently own a substantial amount of our common stock. As of March 12, 2010, Mr. Muniz owns approximately 32% of our common stock; Knoll Capital Management LP, Fred Knoll and Europa International, Inc. own a total of approximately 30% of our common stock; McCash Family Limited Partnership owns approximately 10% of our common stock; James O. McCash and James O. McCash Trust own approximately 6% of our common stock; and Unilab LP owns approximately 10% of our common stock. For more details of beneficial ownership of our shares, see SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Our significant shareholders will be able to exert a significant degree of influence over our management and affairs and all actions requiring stockholders approval, such as the election of directors and approval of significant corporation transaction. In addition, Delaware corporate law provides that certain actions may be taken by consent action of stockholders holding a majority of the outstanding shares. In the event that the requisite approval of stockholders is obtained by consent action, without any meeting of stockholders, dissenting or non-participating stockholders generally would be bound by such vote. Through their concentration of voting power, our significant shareholders could delay, deter or prevent a change in control of our company or other business combinations that might otherwise be beneficial to our other stockholders. Accordingly, this concentration of ownership may harm the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of the Company s other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other shareholders . Our incorporation documents may delay or prevent the removal of our current management or a change of control that a stockholder may consider favorable. We are currently authorized to issue 1,000,000 shares of preferred stock. Our Board of Directors is authorized, without any approval of the stockholders, to issue the preferred stock and determine the terms of the preferred stock. This provision allows the Board to affect the rights of stockholders, since the Board of Directors can make it more difficult for common stockholders to replace members of the Board. Because the Board is responsible for appointing the members of our management, these provisions could in turn affect any attempt to replace current management by the common stockholders. Furthermore, the existence of authorized shares of preferred stock might have the effect of discouraging any attempt by a person, through the acquisition of a substantial number of shares of common stock, to acquire control of us. Accordingly, the accomplishment of a tender offer may be more difficult. This may be beneficial to management in a hostile tender offer, but have an adverse impact on stockholders who may want to participate in the tender offer or inhibit a stockholder s ability to receive an acquisition premium for his or her shares. Events with respect to our share capital could cause the price of our common stock to decline. Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock. We had 47,313,880 shares of common stock outstanding as of the end of our most recently completed fiscal quarter ended January 31, 2010. The following securities that may be exercised into shares of our common stock were issued and outstanding as of January 31, 2010: Options. Stock options to purchase 3,624,267 shares of our common stock at a weighted average exercise price of approximately $1.82 per share. Warrants. Warrants to purchase 51,183,890 shares of our common stock at a weighted average exercise price of approximately $0.56 per share. These warrants include warrants issued in connection with the private financing we completed in October 2009. Notes. Senior Secured Convertible Notes convertible into an aggregate of 24,916,667 shares of our common stock at a conversion price of $0.15 per share, assuming the accrual of three years interests at a rate of 5% on the principals of the Notes upon their maturity date and the payment of such accrued interest with shares of our common stock. (6) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The shares of our common stock that may be issued under the options and warrants are currently registered with the SEC, are being registered with the SEC on a registration statement to which this prospectus forms a part, or are eligible for sale without any volume limitations pursuant to Rule 144 under the Securities Act. The securities issued in our October 2009 private financing include the following: Notes. Senior Secured Convertible Notes, or the Notes, convertible into an aggregate of 24,916,667 shares of our common stock at a conversion price of $0.15 per share, assuming three-year interests will accrue in full at a rate of 5% on the principals of the Notes upon their maturity date. Series A Warrants. Series A Warrants to purchase an aggregate of 21,666,664 shares of our common stock at an exercise price of $0.15 per share with a three-year term. Series B Warrants. Series B Warrants to purchase an aggregate of 21,666,664 shares of our common stock at an exercise price of $0.25 per share with a five-year term (the Series B Warrants and the Series A Warrants collectively refereed to as the Warrants). Pursuant to the terms of an investor rights agreement or the Investor Rights Agreement entered into in connection with the financing, we must file a resale registration statement covering all of the shares issuable upon conversion of the Notes and the shares issuable upon exercise of the Warrants, up to the maximum number of shares able to be registered pursuant to applicable SEC regulations, by May 1, 2010 as the filing deadline and obtain the effectiveness of such registration statement within 90 days following the filing deadline or within 120 days following the filing deadline if the SEC reviews and has written comments to the registration statement. If any securities issuable upon conversion or exercise, respectively, of the Notes and Warrants are unable to be included on the initial resale registration statement, we have agreed to file subsequent registration statements until all of the securities have been registered. We are obligated to maintain the effectiveness of the resale registration statement until all securities therein are sold or otherwise can be sold pursuant to Rule 144 under the Securities Act, without any restrictions. A cash penalty at the rate of 1% per month will be triggered in the event the Company fails to file or obtain the effectiveness of a registration statement prior to the deadlines set forth in the Investor Rights Agreement or if the Company ceases to be current in filing its periodic reports with the SEC. The aggregate penalty accrued with respect to each investor may not exceed 6% of the original purchase price paid by that investor, or 12% if the only effectiveness failure is the Company s failure to be current in its periodic reports with the SEC. We have significant secured indebtedness as a result of a private financing, which we closed in October 2009, pursuant to which we issued the Notes. If we are unable to perform our obligations under such notes, the holders of such notes would be entitled to realize upon their security interest by taking control of all or a portion of our assets. We substantially increased our debt when we issued the Notes in the aggregate principal amount of $3.25 million pursuant to a private financing in October 2009. The Notes mature on the earliest of (i) October 19, 2012; (ii) the closing of a public or private offering of the Company s debt or equity securities subsequent to the date of issuance of the Notes resulting in gross proceeds of at least $8,125,000, other than a transaction involving a stockholder who holds 5% or more of the Company s outstanding capital stock as of the date of issuance of the Notes; or (iii) on the demand of the holder of a Note upon the Company s consummation of a merger, sale of substantially all of its assets, or the acquisition by any entity, person or group of 50% or more of the voting power of the Company. Interest accrues on the principal amount outstanding under the Notes at a rate of 5% per annum, and is due upon maturity. Upon an event of default under the Notes, the interest rate shall increase to 7%. The Notes are convertible into shares of the Company s common stock at the option of the holder of such note at a price of $0.15 per share at any time prior to the date on which the Company makes payment in full of all amounts outstanding under such note. The Notes are not prepayable for a period of one year following the issuance thereof. The Notes are secured by a senior security interest and lien on all of the Company s rights, title and interest to all of the assets owned by the Company as of the issuance of the Notes or thereafter acquired pursuant to the terms of a security agreement entered into by the Company with each of the investors. In the case of an event of default under the Notes, the holders of the notes would be entitled to realize their security interests and foreclose on our assets. In addition, the holders of the notes would be entitled to declare the principal and accrued interest thereunder to be due and payable. Our assets may not be sufficient to fully repay amounts outstanding under the Notes in the event of any such acceleration upon an event of default. The trading market for our common stock may be limited since our common stock is no longer listed on the Nasdaq Capital Market. On January 6, 2009 our common stock was delisted from the Nasdaq Capital Market. Since then our common stock has been quoted on the Pink Sheets and may be thinly traded at times. You may be unable to sell our common stock during times when the trading market is limited. We are subject to penny stock rules. As a consequence, sale of our stock by investors may be difficult. The term penny stock generally refers to low-priced speculative securities of very small companies. We are subject to SEC's penny stock rules. Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer's account. Penny stocks may trade infrequently, which means that it may be difficult to sell our shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment. Risks Related to Our Operations Our lack of operating experience may cause us difficulty in managing our growth. We have no experience in selling pharmaceutical or other products or in manufacturing or procuring drug products in commercial quantities in compliance with FDA regulations and we have only limited experience in negotiating, establishing and maintaining collaborative relationships and conducting later stage phases of the regulatory approval process. Our ability to manage our growth, if any, will require us to improve and expand our management and our operational and financial systems and controls. If our management is unable to manage growth effectively, our business and financial condition would be adversely affected. In addition, if rapid growth occurs, it may strain our operational, managerial and financial resources, which are limited. If we lose key management personnel or are unable to attract and retain the talent required for our business, our business could be materially harmed. We currently have only one executive officer, Charles Muniz, our President, CEO and CFO. We are highly dependent on Mr. Muniz, who has an employment contract with us. During the fiscal year ended July 31, 2009, Kuslima Shogen, our scientific founder and former CEO retired, and Lawrence A. Kenyon, our former President, CFO and Corporate Secretary, resigned. We do not have key man insurance on any of our management. If we were to lose the services of Mr. Muniz or other members of our management team, and were unable to replace them, our product development and the achievement of our strategic objectives could be delayed. In addition, our success will depend on our ability to attract and retain qualified commercial, scientific, technical, and managerial personnel. While we have not experienced unusual difficulties to date in recruiting and retaining personnel, there is intense competition for qualified staff and there is no assurance that we will be able to retain existing personnel or attract and retain qualified staff in the future. We handle hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business. We could also be liable for damages, penalties, or other forms of censure if we are involved in a hazardous waste spill or other accident. Our research and development processes involve the controlled storage, use, and disposal of hazardous materials and biological hazardous materials. We are subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling, and disposal of hazardous materials and certain waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, even by a third party, we could be held liable for any damages that result, and such liability could exceed the $2,000,000 limit of our current general liability insurance coverage and our financial resources. In the future, we may not be able to maintain insurance on acceptable terms, or at all. We could also be required to incur significant costs to comply with current or future environmental laws and regulations. We may be sued for product liability. Our business exposes us to potential product liability that may have a negative effect on our financial performance and our business generally. The administration of drugs to humans, whether in clinical trials or commercially, exposes us to potential product and professional liability risks which are inherent in the testing, production, marketing and sale of new drugs for humans. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance and materially adversely affect our business. We maintain product liability insurance to protect our products and product candidates in amounts customary for companies in businesses that are similarly situated, but our insurance coverage may not be sufficient to cover claims. Furthermore, liability insurance coverage is becoming increasingly expensive and we cannot be certain that we will always be able to maintain or increase our insurance coverage at an affordable price or in sufficient amounts to protect against potential losses. A product liability claim, product recall or other claim, as well as any claim for uninsured liabilities or claim in excess of insured liabilities, may significantly harm our business and results of operations. Even if a product liability claim is not successful, adverse publicity and time and expense of defending such a claim may significantly interfere with our business. Material weaknesses or deficiencies in our internal control over financial reporting could harm stockholders and business partners confidence in our financial reporting, our ability to obtain financing, and other aspects of our business. Internal control over financial reporting can provide only reasonable and not absolute assurance that deficiencies or weaknesses are identified. Additionally, potential control deficiencies that are not yet identified could emerge and internal controls that are currently deemed to be in place and operating effectively are subject to the risk that those controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Identification and corrections of these types of potential control deficiencies could have a material impact on our business, financial position, results of operations and disclosures and impact our ability to raise funds. Risks Related to Our Intellectual Property Our proprietary technology and patents may offer only limited protection against infringement and the development by our competitors of competitive products. We own two patents jointly with the United States government. These patents expire in 2016. We also own eighteen other United States patents with expiration dates ranging from 2013 to 2024, four European patents with expiration dates ranging from 2010 to 2019, three Japanese patents with expiration dates ranging from 2010 to 2016 and one Singaporean patent with an expiration date in 2024. Of the patents we own, five of the United States patents, two of the European patents and two of the Japanese patents have claims that cover ONCONASE (by itself or together with other pharmaceuticals) or relevant manufacturing methodology. The scope of protection afforded by patents for biotechnological inventions is uncertain, and such uncertainty applies to our patents as well. Therefore, our patents may not give us competitive advantages or afford us adequate protection from competing products. Furthermore, others may independently develop products that are similar to our products, and may design around the claims of our patents. Patent litigation and intellectual property litigation are expensive and our resources are limited. To date, we have not received any threats of litigation regarding patent issues. However, if we were to become involved in litigation, we might not have the funds or other resources necessary to conduct the litigation effectively. This might prevent us from protecting our patents, from defending against claims of infringement, or both. We may be sued for infringing on the intellectual property rights of others. Our commercial success also depends in part on ensuring that we do not infringe the patents or proprietary rights of third parties. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. While we have not been sued for infringing the intellectual property rights of others, there can be no assurance that the drug product candidates that we have under development do not or will not infringe on the patent or proprietary rights of others. Third parties may assert that we are employing their proprietary technology without authorization. Moreover, United States patent applications filed in recent years are confidential for 18 months, while older applications are not published until the patent issues. Further, some applications are kept secret during the entire length of their pendency by request of the applicant in special circumstances. As a result, there may be patents of which we are unaware, and avoiding patent infringement may be difficult. Patent holders sometimes send communications to a number of companies in related fields, suggesting possible infringement. If we are sued for patent infringement, we would need to demonstrate that we either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, which we may not be able to do. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to further develop, commercialize and sell products, and such claims could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products or be required to cease commercializing affected products and our operating results would be harmed. In the future, others may file patent applications covering technologies that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party, and this would increase our costs of operations and harm our operating results. FORWARD LOOKING STATEMENTS This prospectus includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, may, will, estimate, continue, anticipate, intend, expect and similar expressions, as they relate to us, our business, or our management, are intended to identify forward looking statements. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward looking statements are subject to a number of risks, uncertainties and assumptions that may be beyond our control. All of our forward looking statements are qualified in their entirety by reference to the factors discussed in this prospectus under the heading RISK FACTORS that could cause results to differ materially from those

parsed_sections/risk_factors/2010/CIK0000713275_pharmos_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ The Compensation Committee is authorized to grant stock options, including both incentive stock options ( ISOs ), which can result in potentially favorable tax treatment to the participant, and non-qualified stock options, and stock appreciation rights entitling the participant to receive the amount by which the fair market value of a share of common stock on the date of exercise exceeds the grant price of the stock appreciation right. The exercise price per share subject to an option and the grant price of a stock appreciation right are determined by the Compensation Committee, but must not be less than the fair market value of a share of common stock on the date of grant. For purposes of the 2009 Plan, the term fair market value means the fair market value of common stock, awards or other property as determined by the Compensation Committee or under procedures established by the Compensation Committee. Unless otherwise determined by the Compensation Committee, the fair market value of common stock as of any given date shall be the closing sales price per share of common stock as reported on the principal stock exchange or market on which common stock is traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported or the average of the closing bid and asked prices for the common stock quoted by an established quotation service for over-the-counter securities, if the common stock is not then traded on a national securities exchange, or, in the discretion of the Committee, the last sale price or the closing price. The maximum term of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the Compensation Committee, except that no option or stock appreciation right may have a term exceeding ten years. Methods of exercise and settlement and other terms of the stock appreciation right are determined by the Compensation Committee. The Compensation Committee, thus, may permit the exercise price of options awarded under the 2009 Plan to be paid in cash, shares, other awards or other property (including loans to participants). Options may be exercised by payment of the exercise price in cash, shares of common stock, outstanding awards or other property having a fair market value equal to the exercise price, as the Compensation Committee may determine from time to time. The Compensation Committee is authorized to grant restricted stock and deferred stock. Restricted stock is a grant of shares of common stock which may not be sold or disposed of, and which shall be subject to such risks of forfeiture and other restrictions as the Compensation Committee may impose. A participant granted restricted stock generally has all of the rights of a stockholder of our company, unless otherwise determined by the Compensation Committee. An award of deferred stock confers upon a participant the right to receive shares of common stock at the end of a specified deferral period, subject to such risks of forfeiture and other restrictions as the Compensation Committee may impose. Prior to settlement, an award of deferred stock carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents may be granted, as discussed below. The Compensation Committee is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred basis, cash, shares of common stock, other awards or other property equal in value to dividends paid on a specific number of shares of common stock or other periodic payments. Dividend equivalents may be granted alone or in connection with another award, may be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional shares of common stock, awards or otherwise as specified by the Compensation Committee. The Compensation Committee is authorized to grant shares of common stock as a bonus free of restrictions, or to grant shares of common stock or other awards in lieu of company obligations to pay cash under the 2009 Plan or other plans or compensatory arrangements, subject to such terms as the Compensation Committee may specify. The Compensation Committee or our Board of Directors is authorized to grant awards that are denominated or payable in, valued by reference to, or otherwise based on or related to shares of common stock. The Compensation Committee determines the terms and conditions of such awards. Registration No. 333-138723 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Post-Effective Amendment No. 1 on FORM S-1 to FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PHARMOS CORPORATION (Exact name of registrant as specified in its charter) Nevada 2834 36-3207413 (State or other jurisdiction of (Primary SIC Number) (I.R.S. Employer incorporation or organization) Identification No.) 99 Wood Avenue South, Suite 311 Iselin, New Jersey 08830 (732) 452-9556 (Address, including zip code, and telephone number, including area code, of principal executive offices) S. Colin Neill 99 Wood Avenue South, Suite 311 Iselin, New Jersey 08830 (732) 452-9556 (Name, address, including zip code, and telephone number, including area code, of agent for service) With a copy to: Adam D. Eilenberg, Esq. Eilenberg & Krause LLP 11 East 44th Street New York, New York 10017 Tel. (212) 986-9700 Fax (212) 986-2399 If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company x The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Pursuant to Rule 401(b) under the Securities Act of 1933, and in order to comply with Section 10(a)(3) of the Securities Act, the Registrant is filing this Post-Effective Amendment on Form S-1 because it is currently ineligible to file a registration statement on Form S-3. Pursuant to Rule 429 under the Securities Act, the prospectus contained in this Post-Effective Amendment on Form S-1 shall serve as a combined prospectus that also relates to, and this Post-Effective Amendment on Form S-1 shall act, upon effectiveness, as a post-effective amendment to, the Registrant s previous Registration Statement on Form S-3, Registration No. 333-149604. ABOUT THIS PROSPECTUS Unless the context otherwise requires, all references to Pharmos, we, us, our, our company, or the Company in this prospectus refer to Pharmos Corporation, a Nevada corporation, and its subsidiaries, and their respective predecessor entities for the applicable periods, considered as a single enterprise. You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. For further information, please see the section of this prospectus entitled Where You Can Find More Information. The selling stockholders are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information appearing in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of a security. Our business, financial condition, results of operations and prospects may have changed since those dates. EXPLANATORY NOTE The prospectus contained in this registration statement serves as a combined prospectus relating to two previously filed registration statements. Alternate versions of certain pages of the prospectus relating to registration statement No. 333-138723 appear following page F-24, and serve as replacement pages to form the prospectus relating to registration statement No. 333-149604 as follows: page A-1 replaces the prospectus cover page; page A-2 replaces page 5; and pages A-3 and A-4 replace pages 13-16. PROSPECTUS SUMMARY This summary highlights important features of this offering and the information included in this prospectus. This summary does not contain all of the information that you should consider before investing in our securities. You should read this prospectus carefully as it contains important information you should consider when making your investment decision. See Risk Factors beginning on page 6. About Pharmos Pharmos Corporation (the Company or Pharmos) is a biopharmaceutical company that discovers and develops novel therapeutics to treat a range of diseases of the nervous system, including disorders of the brain-gut axis (e.g., Irritable Bowel Syndrome), with a focus on pain/inflammation, and autoimmune disorders. The Company's most advanced product is Dextofisopam for the treatment of irritable bowel syndrome (IBS). IBS is a chronic and sometimes debilitating condition that affects roughly 10%-15% of U.S. adults and is two to three times more prevalent in women than in men. With an absence of safe and effective therapies, Dextofisopam s novel non-serotonergic activity holds the potential for a unique and innovative treatment approach to IBS with diarrhea predominant and alternating patients. On September 14, 2009, the Company announced the results of its Phase 2b Dextofisopam clinical trial to evaluate safety and efficacy of the compound in irritable bowel syndrome. Although the primary efficacy variable (% of weeks responding for adequate overall relief of IBS symptoms) did not reach statistical significance, the percentage responding for the Dextofisopam 200 mg group was higher than that observed for the Phase 2a trial. However, the placebo response rate was also higher than expected compared to the Phase 2a placebo response. The Company s strategy is to seek a pharmaceutical partner with the appropriate GI clinical and scientific expertise for further development of Dextofisopam. On October 21, 2009 the Company announced that it had engaged Cowen and Company as advisors to assist with accelerating a partnership arrangement for Dextofisopam. The Company s primary focus is on the development and partnering of Dextofisopam and to that end cash resources are being conserved and targeted for that program. On August 29, 2008 the Company announced that effective October 31, 2008 it would cease operations in Rehovot, Israel, and manage those activities out of the Company s US headquarters in Iselin, New Jersey. The Company s subsidiary in Israel, Pharmos Ltd. is being voluntarily liquidated. The Company expects this to be completed by March 31, 2010. Principal Executive Offices Our principal executive offices are located at 99 Wood Avenue South, Suite 311, Iselin, New Jersey 08830. Our telephone number is (732) 452-9556 and our website address is www.pharmoscorp.com. The information on our website is not incorporated by reference into this prospectus and should not be relied upon with respect to this offering. The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2010 PROSPECTUS PHARMOS CORPORATION Common Stock The Offering Securities Offered Up to 17,750,000 shares of our common stock offered by selling security holders Use of Proceeds We will not receive any proceeds from the sale of shares by the selling security holders. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated by reference contain, in addition to historical information, forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and can be identified by the use of forward-looking terminology such as may, could, expect, anticipate, estimate, continue or other similar words. These forward-looking statements are based on management s current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in these statements. We caution investors that actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described in, or incorporated by reference into, the Risk Factors section of this prospectus. We cannot assure you that we have identified all the factors that create uncertainties. Readers should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. RISK FACTORS We are very largely dependent upon the success of our lead drug candidate, Dextofiosopam, currently being developed for Irritable Bowel Syndrome, for diarrhea predominant patients. We currently have one product candidate, Dextofisopam that has completed Phase 2b clinical trials. Our other drug candidate assets are in earlier stages of development and are not currently being developed. Our primary focus is on the development and partnering of Dextofisopam. We engaged Cowen and Company in late 2009 to help us accelerate and secure a partnership arrangement for Dextofisopam with a pharmaceutical company with greater scientific and financial resources than we have. If we fail to secure a partnership arrangement, or raise additional capital, our operations will need to be scaled back or discontinued. We closed our operations in Israel in late 2008 and those earlier stage assets are available for licensing. We are at an early stage of development. We are at an early stage of development. Our sole product candidate, Dextofisopam, has completed a Phase 2b trial for the treatment of Irritable Bowel Syndrome (IBS). While the trial did not meet the primary endpoint, the drug treatment group at 200 mg demonstrated activity and secondary response variables of adequate relief of abdominal pain and discomfort, and overall IBS symptoms ratings showed statistical significance and trends favoring the Dextofisopam group compared to placebo. Although the primary efficacy variable did not reach statistical significance, the percentage responding for the Dextofisopam 200 mg group was higher than that observed in the successful Phase 2a trial. However, the placebo was also higher than the Phase 2a trial. We plan to seek a pharmaceutical partner with the appropriate GI clinical and scientific expertise for further development of Dextofisopam; however, there can be no assurance that we will be able to find such a partner. We have no other products in development. We will need to raise additional capital. Our ability to operate as a going concern is dependent upon raising adequate financing or securing a partnership arrangement for Dextofisopam. Except for 2001, the Company has experienced operating losses every year since inception in funding the research, development and clinical testing of our drug candidates. The Company had an accumulated deficit of $209.8 million as of December 31, 2009 and expects to continue to incur losses going forward. Such losses have resulted principally from costs incurred in research and development and from general and administrative expenses. Previously the Company had financed its operations with public and private offerings of securities, advances and other funding pursuant to an earlier marketing agreement with Bausch & Lomb, grants from the Office of the Chief Scientist of Israel, research contracts, the sale of a portion of its New Jersey net operating loss carryforwards (NOL s), and interest income. Although the Company received $3.9 million in December 2009 from the sale of their NOL s and had approximately $4.6 million of cash and cash equivalents at December 31, 2009, the Company is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional capital to either advance its lead compound, Dextofisopam, for the treatment of IBS or to advance other earlier stage intellectual property assets. During the year, the Company engaged an investment advisor to assist with these strategies but has not been successful to date. The Company has in the past pursued various funding and financing options; however management believes that future funding or financing options may be challenging because of the current environment. Also, the Company does not currently have the finances and resources to complete full clinical trials for its lead compound, Dextofisopam. As a result it may decide to embark on smaller clinical trials for Dextofisopam or commence pre-clinical development on its other intellectual property assets which could further reduce the company s current resources. We have been delisted from Nasdaq. On March 13, 2009, the Company was officially delisted from the Nasdaq Capital Market, and is currently trading on the OTCBB pink sheets. The Company was not in compliance with the minimum $2,500,000 stockholders requirement for continued listing and was unable to comply during the grace period extended by Nasdaq. As a result of trading on the OTCBB pink sheets, liquidity for our common stock may be significantly decreased which could reduce trading price and increase the transaction costs of trading shares of the company s common stock. The price of our Common Stock may experience volatility. The trading price of our Common Stock could be subject to wide fluctuations in response to variations in our quarterly operating results, the failure of trial results, the failure to bring products to market, conditions in the industry, and the outlook for the industry as a whole or general market or economic conditions. In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many companies, often unrelated to the operating performance of the specific companies. Such market fluctuations could have a material adverse effect on the market price for our securities. We have certain obligations to indemnify our officers and directors. We have certain obligations to indemnify our officers and directors and to advance expenses to such officers and directors. Although we have purchased liability insurance for our directors and officers, if our insurance carriers should deny coverage, or if the indemnification costs exceed the insurance coverage, we may be forced to bear some or all of these indemnification costs directly, which could be substantial and may have an adverse effect on our business, financial condition, results of operations and cash flows. If the cost of our liability insurance increases significantly, or if this insurance becomes unavailable, we may not be able to maintain or increase our levels of insurance coverage for our directors and officers, which could make it difficult to attract or retain qualified directors and officers. We have a history of operating losses and expect to sustain losses in the future. We have experienced significant operating losses since our inception. As of December 31, 2009, we had an accumulated deficit of approximately $210 million. We expect to incur operating losses over the next several years as our research and development efforts and preclinical and clinical testing activities continue. Our ability to generate revenues and achieve profitability depends in part upon our ability, alone or with others, to successfully complete development of our proposed products, to obtain required regulatory approvals and to manufacture and market our products. Our product candidates may not successfully complete clinical trials required for commercialization, and as a result our business may never achieve profitability. To obtain regulatory approvals needed for the sale of our drug candidates, we must demonstrate through testing and clinical trials that each drug candidate is both safe and effective for the human population that it was intended to treat. In general, two successful Phase III clinical trials are required. The clinical trial process is complex and the regulatory environment varies widely from country to country. Positive results from testing and early clinical trials do not ensure positive results in the Phase III human clinical trials. Many companies in our industry have suffered significant setbacks in Phase III, potentially pivotal clinical trials, even after promising results in earlier trials. The results from our trials, if any, may show that our drug candidates produce undesirable side effects in humans or that our drug candidates are not safe or effective or not safe or effective enough to compete in the marketplace. Such results could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a drug candidate. Moreover, we, the FDA, or foreign regulatory authorities may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks or that our drug candidates are not safe or effective enough. Clinical trials are lengthy and expensive. They require adequate supplies of drug substance and sufficient patient enrollment. Patient enrollment is a function of many factors, including: the size of the patient population, the nature of the protocol (i.e., how the drug is given, and the size and frequency of the dose and use of placebo control), the proximity of patients to clinical sites, and the eligibility criteria for the clinical trial (i.e., age group, level of symptoms, concomitant diseases or medications etc.). Delays in patient enrollment or negative trial outcomes can result in increased costs and longer development times. Even if we successfully complete clinical trials, we may not be able to file any required regulatory submissions in a timely manner and we may not receive regulatory approval for the particular drug candidate that was tested. In addition, if the FDA or foreign regulatory authorities require additional clinical trials, we could face increased costs and significant development delays. Changes in regulatory policy or additional regulations adopted during product development and regulatory review of information we submit could also result in delays or rejections. Our clinical trials depend on third party investigators who are outside our control. We depend upon the personnel of third party independent investigators to conduct our clinical trials. Such personnel are not our employees, and we cannot control the amount of time or resources that they devote to our programs. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If such third-party personnel fail to devote sufficient time and resources to our clinical trials, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. Such third-party investigators may also have relationships with other commercial entities that compete with us. If they assist our competitors at our expense, our competitive position would be harmed. We face extensive governmental regulation and any failure to adequately comply could prevent or delay product approval or cause the disallowance of our products after approval. The FDA and comparable agencies in foreign countries impose many requirements on the introduction of new drugs through lengthy and detailed clinical testing procedures, and other costly and time consuming compliance procedures. These requirements make it difficult to estimate when any of our products in development will be available commercially, if at all. In addition, the FDA or other comparable agencies in foreign countries may impose additional requirements in the future that could further delay or even stop the commercialization of our products in development. Our proprietary compounds in development require substantial clinical trials and FDA review as new drugs. Even if we successfully enroll patients in our clinical trials, patients may not respond to our potential drug products. We think it is prudent to expect setbacks and possible product failures. Failure to comply with the regulations applicable to such testing may delay, suspend or cancel our clinical trials, or the FDA might not accept the test results. The FDA, or any comparable regulatory agency in another country, may suspend clinical trials at any time if it concludes that the trials expose subjects participating in such trials to unacceptable health risks. Further, human clinical testing may not show any current or future product candidate to be safe and effective to the satisfaction of the FDA or comparable regulatory agencies or the data derived there from may be unsuitable for submission to the FDA or other regulatory agencies. We cannot predict with certainty when we might submit any of our proposed products currently under development for regulatory review. Once we submit a proposed product for review, the FDA or other regulatory agencies may not issue their approvals on a timely basis, if at all. If we are delayed or fail to obtain such approvals, our business may be damaged due to the resulting inability to generate revenues from the sale of such product. If we fail to comply with regulatory requirements, either prior to approval or in marketing our products after approval, we could be subject to regulatory or judicial enforcement actions. These actions could result in: injunctions; criminal prosecution; refusals to approve new products and withdrawal of existing approvals; and enhanced exposure to product liabilities. We need to find collaborative partners. Our strategy for the development, clinical testing, manufacture, marketing and commercialization of our products includes the use of collaborations with corporate partners, licensors, licensees and others. Due to the often unpredictable nature of the collaboration process, we cannot be sure that any present or future collaborative agreements will be successful. To the extent we choose not to or are not able to establish such arrangements, we would experience increased capital requirements. In addition, we may encounter significant delays in introducing our products currently under development into certain markets or find that the development, manufacture, or sale of those products is hindered by the absence of collaborative agreements due to the relatively small size of our company as compared with that of some of our potential competitors. The value of our research could diminish if we cannot protect or enforce our intellectual property rights adequately. We actively pursue both domestic and foreign patent protection for our proprietary products and technologies. We have filed for patent protection for our technologies in all markets we believe to be important for the development and commercialization of our drug products; however, our patents may not protect us against our competitors. We may have to file suit to protect our patents or to defend our use of our patents against infringement claims brought by others. Because we have limited cash resources, we may not be able to afford to pursue or defend against litigation in order to protect our patent rights. As a result, while we currently have no specific concerns about gaps in our intellectual property portfolio, we recognize that for companies like ours, where intellectual property constitutes a key asset, there is always a risk that a third party could assert a patent infringement claim or commence a patent interference action. Defending against any such claims or actions could be very costly to us, even if they were without merit. We also rely on trade secret protection for our unpatented proprietary technology. However, trade secrets are difficult to protect. While we enter into proprietary information agreements with our employees and consultants, these agreements may not successfully protect our trade secrets or other proprietary information. We face large competitors and our limited financial and research resources may limit our ability to develop and market new products. The pharmaceutical industry is highly competitive. We compete with a number of pharmaceutical companies that have financial, technical and marketing resources that are significantly greater than ours. Some companies with established positions in the pharmaceutical industry may be better equipped than we are to develop, market and distribute products in the global markets we seek to enter. A significant amount of pharmaceutical research is also being carried out at universities and other not-for-profit research organizations. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology they have developed. They may also market competitive commercial products on their own or through joint ventures and may compete with us in recruiting highly qualified scientific personnel. Further, these institutions may compete with us in recruiting qualified patients for enrollment in their trials. We are pursuing areas of product development in which there is a potential for extensive technological innovation. Our competitors may succeed in developing products that are more effective than those we develop. Rapid technological change or developments by others may result in our potential products becoming obsolete or non-competitive. We lack manufacturing capability. Other than for the production of clinical trial material, we currently do not have manufacturing facilities. Should any of our products receive approval for marketing, we would likely need to find third party manufacturers to assist in their production. If we should be unable to find such manufacturers with which to work on commercially reasonable terms, it could delay or restrict any potential revenues from such products. We use hazardous materials in our research. As with most other pharmaceutical companies, our research and development involves the controlled use of hazardous materials. Our laboratories store and/or produce carbon monoxide, nitric acid and ammonia. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply in all material respects with the standards prescribed by government regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any resulting damages which may or may not be covered by insurance. We have certain anti-takeover provisions and are also subject to certain Nevada anti-takeover provisions that may make it difficult for a third party to acquire us or for stockholders to replace or remove current management. Further, the board controls a majority of the outstanding shares. After the equity financing in April 2009, the current board represents 61% of the outstanding shares and on a fully diluted basis a total of 67% as of December 31, 2009. Additionally, we have adopted a stockholder rights plan that imposes a significant penalty upon any person or group that acquires 15% or more of our outstanding common stock without the approval of our board. Moreover, certain provisions of the

parsed_sections/risk_factors/2010/CIK0000727672_spectrasci_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS You should carefully consider the risks described below before purchasing our Common Stock. Our most significant risks and uncertainties are described below; however, they are not the only risks we face. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially adversely affected, the price of our Common Stock could decline, and you may lose all or part of your investment therein. You should acquire shares of our Common Stock only if you can afford to lose your entire investment. RISKS RELATED TO OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE. We have yet to establish any history of profitable operations. We have incurred annual operating losses of $4,436,812 and $5,271,332, respectively, during the past two fiscal years of operation and an operating loss of $1,868,590 for the six months ended June 30, 2010. As a result, at June 30, 2010 we had an accumulated deficit of $22,541,760. We have incurred net losses from continuing operations of $4,432,187 and $5,144,902 for the fiscal years ending 2009 and 2008 and net losses from continuing operations of $1,870,902 in the six months ended June 30, 2010. Our revenues have not been sufficient to sustain our operations. We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our failure to generate meaningful revenues and ultimately profits from the WavSTAT and LUMA systems and applications of our technology could force us to raise additional capital which may not be available on acceptable terms. This could ultimately reduce or suspend our operations and ultimately could cause us to go out of business. Our profitability will require the successful commercialization of our imaging systems and no assurances can be given when this will occur or if we will ever be profitable. WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS At June 30, 2010 we had a working capital balance of $5,025,237. We had an operating cash flow deficit of $2,463,180 and $3,811,212 for the fiscal years ended December 31, 2009 and 2008, respectively, and an operating cash flow deficit of $1,329,345 for the six month period ended June 30, 2010. Between April 29, 2010 and June 17, 2010, the Company sold 15,766,155 shares of Series C Convertible Preferred Stock including common stock purchase warrants to purchase 7,883,078 shares at $0.30 per share and common stock purchase warrants to purchase 1,576,616 shares at $0.35 per share. The Company received gross proceeds of $3,153,231 from the sale and net proceeds of $2,699,736 after payment of $453,388 in fees. The Company also has in place, but has not utilized, a $6.0 million Common Stock Purchase Agreement ( Purchase Agreement ) with Fusion Capital Fund II LLC ( Fusion Capital ). We only have the right to receive $25,000 every two business days under the Purchase Agreement with Fusion Capital unless our stock price equals or exceeds $0.30, in which case we can sell greater amounts to Fusion Capital as the price of our Common Stock increases. Fusion Capital does not have the right nor the obligation to purchase any shares of our Common Stock on any business day that the market price of our Common Stock is less than $0.15. We have previously registered 13,300,000 shares for sale by Fusion Capital pursuant to a previously filed prospectus (11,558,974 total registered shares to be issued and sold under the Purchase Agreement, plus 100,000 expense shares, 1,094,017 initial commitment shares and 547,009 allocable commitment shares). The selling price of our Common Stock to Fusion Capital will have to average approximately $0.52 per share for us to receive the maximum proceeds of $6.0 million. Assuming a purchase price of $0.21 per share (the closing sale price of the Common Stock on August 19, 2010) and the purchase by Fusion Capital of the full 11,558,974 shares remaining under the Purchase Agreement, proceeds to us would only be $2,427,385 unless we choose to register more shares which we may sell to Fusion Capital, which we have the right, but not the obligation, to do. Investing in the Common Stock involves certain risks. See Risk Factors beginning on page 4 for a discussion of these risks. The extent to which we will rely on Fusion Capital as a source of funding will depend on a number of factors including, the prevailing market price of our Common Stock and the extent to which we are able to secure working capital from other sources. If obtaining additional financing from Fusion Capital were to prove unavailable or prohibitively dilutive and if we are unable to commercialize and sell enough of our products, we will need to secure additional funding in order to satisfy our working capital needs. Even if we are able to access the full $6.0 million under the Purchase Agreement with Fusion Capital, we may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could have a material adverse effect on our business, operating results, financial condition and prospects. THE SALE OF OUR SERIES C CONVERTIBLE PREFERRED STOCK AND ITS SUBSEQUENT CONVERSION WILL CAUSE DILUTION AND THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED BY THE HOLDERS OF OUR SERIES C CONVERTIBLE PREFERRED STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE In connection with the conclusion of our sale of Series C Convertible Preferred Stock, we sold a total of 15,766,155 shares of Series C Convertible Preferred Stock at $0.20 per share, convertible into a like number of shares of Common Stock. In addition, we issued common stock purchase warrants to purchase an additional 7,883,078 shares of Common Stock at $0.30 per share and common stock purchase warrants to purchase an additional 1,576,616 shares of Common Stock at $0.35 per share. All 25,225,849 shares registered for the holders in this offering are expected to be freely tradable and can be sold so long as this registration statement is effective. Depending upon market liquidity at the time, a sale of shares under this offering at any given time could cause the trading price of our Common Stock to decline. The sale of a substantial number of shares of our Common Stock under this offering, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. WE MAY FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES. Competitive forces may impact our projected growth and ability to generate revenues and profits, which would have a negative impact on our business and the value of your investment. Our competitors may be developing products which compete with the WavSTAT and LUMA Systems. Our commercial opportunities would then be reduced or eliminated should our competitors develop and market products for any of the diseases that we target that are more effective or are less expensive than the products or product candidates we are developing. Even if we are successful in developing effective WavSTAT and LUMA Systems, and we obtain FDA and other regulatory approvals necessary for commercializing them, our products may not compete effectively with other successful products. Researchers are continually learning more about diseases, which may lead to new technologies and tools for analysis. Our competitors include fully integrated medical device companies, universities and public and private research institutions. Many of the organizations competing with us may have substantially greater capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining regulatory approvals, and greater marketing capabilities than we do. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The market for medical devices is intensely competitive. Many of our potential competitors have longer operating histories, greater name recognition, more employees, and significantly greater financial, technical, marketing, public relations, and distribution resources than we have. This intense competitive environment may require us to make changes in our products, pricing, licensing, services or marketing to develop, maintain and extend our current technology. Price concessions or the emergence of other pricing or distribution strategies of competitors may diminish our revenues, adversely impact our margins or lead to a reduction in our market share, any of which may harm our business. OUR WavSTAT AND LUMA SYSTEMS TECHNOLOGY MAY BECOME OBSOLETE. Our WavSTAT and LUMA Systems products may be rendered unmarketable by new scientific or technological developments where new treatment alternatives are introduced that are more effective or more economical than our WavSTAT and LUMA System products. Any one of our competitors could develop a more effective product which would render our technology obsolete. WE ARE DEPENDENT FOR OUR SUCCESS ON A KEY EXECUTIVE OFFICER. Our success depends to a critical extent on the continued services of our Chief Executive Officer, Jim Hitchin. If we lost this key executive officer, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We can give you no assurance that we could find a satisfactory replacement for this key executive officer at all, or on terms that are not unduly expensive or burdensome. We do not have an employment agreement with Mr. Hitchin and his employment is severable by either party at will. OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES. We currently have a staff of eight full-time employees, consisting of, among others, our Chief Executive Officer, Chief Financial Officer, Director of Sales and Marketing, Operations Manager and Chief Engineer, as well as administrative employees and other personnel employed on a contract basis. Although we believe that these employees, together with the consultants currently engaged by the Company, will be able to handle most of our additional administrative, research and development and business development in the near term, we will nevertheless be required over the longer-term to hire highly skilled managerial, scientific and administrative personnel to fully implement our business plan and growth strategies. We cannot assure you that we will be able to engage the services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to our limited financial resources and lack of an established track record. WE PLAN TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT. We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties. This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and retain the anticipated increased number of employees. WE MAY HAVE DIFFICULTY IN DEVELOPING AND RETAINING AN EFFECTIVE SALES FORCE OR IN OBTAINING EFFECTIVE DISTRIBUTION PARTNERS AND MAY NOT BE ABLE TO ACHIEVE SUFFICIENT REVENUES TO EFFECT OUR BUSINESS PLAN The market for skilled sales and marketing personnel is highly competitive and specialized. If we are unable to hire and retain skilled and knowledgeable sales people it may negatively impact our ability to introduce our products or generate revenue sufficient to affect our future business plans. In addition our inability to develop business relationships with key technical distributors may also negatively impact our ability to successfully market our products. WE MAY BE UNSUCCESSFUL IN COMMERCIALIZING THE LUMA ASSETS With the successful acquisition of the Luma Imaging Corporation s stock in November 2007, we continue to assess and redeploy its assets, primarily intellectual property, to successfully commercialize the LUMA products. Our limited number of technical and marketing personnel, and our limited budget, may be inadequate for successful market development. WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD COMPANY. The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending such claims. We currently carry directors and officers liability insurance, but such insurance is expensive and can be difficult to obtain. If we are unable to obtain directors and officers liability insurance at affordable rates or at all in the future, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our board of directors. As a company with a limited operating history and limited resources, we will have a more difficult time attracting and retaining management and outside independent directors than a more established company due to these enhanced duties, obligations and liabilities. IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND FOREIGN REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCTS COULD BE PREVENTED OR DELAYED. Our WavSTAT and LUMA Systems are subject to extensive government regulations related to development, testing, manufacturing and commercialization in the United States and other countries. The determination of when and whether a product is ready for large scale purchase and potential use will be made by the government through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, and the Centers for Disease Control and Prevention. Some of our product candidates are in the clinical stages of development and we have not received required regulatory approval from the FDA for the esophageal or lung applications we hope to commercially market. The process of obtaining and complying with FDA and other governmental regulatory approvals and regulations is costly, time consuming, uncertain and subject to unanticipated delays. Despite the time and expense incurred, regulatory approval is never guaranteed. We also are subject to the following risks and obligations, among others: The FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied; The FDA may require additional testing for safety and effectiveness; The FDA may interpret data from pre-clinical testing and clinical trials in different ways than us; If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and The FDA may change their approval policies and/or adopt new regulations Failure to comply with these or other regulatory requirements of the FDA may subject us to administrative or judicially imposed sanctions, including: Warning letters; Civil penalties; Criminal penalties; Injunctions; Product seizure or detention; Product recalls; and Total or partial suspension of production DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR WavSTAT AND LUMA SYSTEM CANDIDATES. Our business prospects will depend on our ability to complete clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize our WavSTAT and LUMA System product candidates. Completion of our clinical trials, announcement of results of the trials and our ability to obtain regulatory approvals could be delayed for a variety of reasons, including: Unsatisfactory results of any clinical trial; The failure of principal third-party investigators to perform clinical trials on our anticipated schedules; and Different interpretations of pre-clinical and clinical data, which could initially lead to inconclusive results OUR DEVELOPMENT COSTS WILL INCREASE IF WE HAVE DELAYS IN ANY CLINICAL TRIAL OR IF WE NEED TO PERFORM MORE OR LARGER CLINICAL TRIALS THAN PLANNED. If the delays are significant, or if any of our WavSTAT System or LUMA product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval. THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR EFFICIENT, AND MAY MAKE MISTAKES IN THE CONDUCT OF OUR CLINICAL TRIALS. We depend on independent clinical investigators to conduct our clinical trials. The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our product development programs. If independent investigators fail to devote sufficient time and resources to our product development programs, or if their performance is substandard, it may delay FDA approval of our products. These independent investigators may also have relationships with other commercial entities, some of which may compete with us. If these independent investigators assist our competitors at our expense, it could harm our competitive position. OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO UNFAVORABLE RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES. Our success depends on our ability to successfully develop and obtain regulatory approval to market new products. We expect that a significant portion of the research that we will conduct will involve new and unproven technologies. Development of a product requires substantial technical, financial and human resources even if the product is not successfully completed. Potential products may appear to be promising at various stages of development yet fail to reach the market for a number of reasons, including the: Lack of adequate quality or sufficient prevention benefit, or unacceptable safety during pre-clinical studies or clinical trials; Failure to receive necessary regulatory approvals; Existence of proprietary rights of third parties; and/or Inability to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT. We rely on a combination of patent, patent pending, copyright, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our intellectual property. We cannot give you any assurance that these measures will prove to be effective in protecting our intellectual property. In the case of patents, we cannot give you any assurance that our existing patents will not be invalidated, that any patents that we currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits. Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents. While we currently have and intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United States. We can give you no assurance that we will be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement. Similarly, we cannot give you any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights. Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial. The WavSTAT System is protected by eight issued patents in the United States, Europe and Japan, all of which we own, and one additional patent for which we own the exclusive license. Our LUMA system is the subject of 52 patent applications worldwide, 34 of which have issued and 18 patents are pending. We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection. We cannot give you any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how. While we have and will continue to enter into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed by those employees or parties while engaged by the Company, we can give you no assurance that courts of competent jurisdiction will enforce those agreements. THE PATENTS WE OWN COMPRISE A LARGE PORTION OF OUR ASSETS, WHICH COULD LIMIT OUR FINANCIAL VIABILITY. One of the eight issued patents for the WavSTAT System has lapsed for failure to pay maintenance fees, and we are in the process of attempting to re-instate the patent. We cannot assure you that we will be successful in reinstating the patent. Our patents comprise approximately 31% of our assets at June 30, 2010. If our existing patents are invalidated or if they fail to provide significant commercial benefits, it will severely hurt our financial condition, as a significant percentage of our assets would lose their value. Further, since our patents are amortized over the course of their term until they expire, our assets comprised of patents will continually be written down until they lose value altogether. LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS. Compliance with publicly-traded company regulations adversely impacts our resources. As a publicly-traded company, we are subject to rules and regulations that increase our legal and financial compliance costs, make some activities more time-consuming and costly, and divert our management's attention away from the operation of our business. We are obligated to file with the U.S. Securities and Exchange Commission, or the SEC, annual and quarterly information and other reports that are specified in the Securities Exchange Act of 1934, or the Exchange Act, and are also subject to other reporting and corporate governance requirements, including requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act, and the rules and regulations promulgated thereunder, which impose significant compliance and reporting obligations upon us. We may not be successful in complying with these obligations, and compliance with these obligations could be time consuming and expensive. Failure to comply with the additional reporting and corporate governance requirements could lead to fines imposed on us, deregistration under the Exchange Act and, in the most egregious cases, criminal sanctions could be imposed. OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS. Our WavSTAT and LUMA System products may be used in connection with medical procedures in which it is important that those products function with precision and accuracy. If our products do not function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed, or an inappropriate design, we may be subject to lawsuits seeking significant compensatory and punitive damages. Any product recall or lawsuit seeking significant monetary damages may have a material adverse effect on our business and financial condition. RISK FACTORS RELATED TO OUR SECURITIES WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE PAID IN THE FORESEEABLE FUTURE. We do not anticipate paying cash dividends on our Common Stock in the foreseeable future, and we cannot assure an investor that funds will ever be available to pay a dividend or that even if the funds are available, that a dividend will be paid. THE APPLICATION OF THE PENNY STOCK RULES COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL OUR COMMON STOCK. As long as the trading price of our Common Stock is below $5 per share, the open-market trading of our Common Stock will be subject to the penny stock rules. The penny stock rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our Common Stock, and may result in decreased liquidity for our Common Stock and increased transaction costs for sales and purchases of our Common Stock as compared to other securities. OUR COMMON STOCK IS THINLY TRADED, SO INVESTORS MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL. Our Common Stock has historically been sporadically or thinly-traded , meaning that the number of persons interested in purchasing our Common Stock at or near ask prices at any given time may be relatively small or non-existent. As of August 19, 2010, our average trading volume per day for the past three months was approximately 38,000 shares a day with a high of 160,500 shares traded and a low of 0 shares traded per day. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained. THE MARKET PRICE FOR OUR COMMON STOCK IS PARTICULARLY VOLATILE, GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUES. The market for our Common Stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the foreseeable future. In fact, during the ninety-day period ended August 19, 2010, the high and low closing prices of a share of our Common Stock were $0.30 and $0.20, respectively. The volatility in our share price is attributable to a number of factors. First, as noted above, our stock is sporadically and/or thinly-traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or risky investment due to our limited operating history and lack of revenues or profits to date and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our Common Stock: actual or anticipated variations in our quarterly or annual operating results; acceptance of our proprietary technology; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments; and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our Common Stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our Common Stock will be at any time, including as to whether our Common Stock will sustain their current market prices, or as to what effect that the sale of shares or the availability of Common Stock for sale at any time will have on the prevailing market price. Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price. In addition, potential dilutive effects of future sales of shares of Common Stock by shareholders and by the Company pursuant to this Prospectus could have an adverse effect on the market price of our shares. VOLATILITY IN OUR COMMON STOCK PRICE MAY SUBJECT US TO SECURITIES LITIGATION. The market for our Common Stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have sometimes initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management s attention and resources. OUR OFFICERS AND DIRECTORS OWN OR CONTROL APPROXIMATELY 16% (INCLUDING ALL OPTIONS EXERCISABLE WITHIN 60 DAYS OF AUGUST 19, 2010) OF OUR OUTSTANDING COMMON STOCK, WHICH MAY LIMIT THE ABILITY OF OTHER SHAREHOLDERS, WHETHER ACTING SINGLY OR TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF THE COMPANY. As of August 19, 2010, our officers and directors beneficially own or control approximately 16% (including all options exercisable within sixty days of August 19, 2010) of our outstanding Common Stock. These persons will have the ability to significantly influence all matters submitted to our shareholders for approval and to control our management and affairs, including extraordinary transactions such as mergers and other changes of corporate control, and going private transactions which could discourage or prevent a potential takeover of the Company that might otherwise result in shareholders receiving a premium over the market price of their common stock . A LARGE NUMBER OF SHARES OF COMMON STOCK ARE ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS. THE EXERCISE OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL DILUTION OF THE INVESTMENT OF OTHER SHAREHOLDERS IN TERMS OF PERCENTAGE OWNERSHIP IN THE COMPANY AS WELL AS THE BOOK VALUE OF THE COMMON STOCK. As of August 19, 2010, there are outstanding Common Stock purchase options entitling the holders to purchase 8,200,000 shares of Common Stock at a weighted average exercise price of $0.51 per share (5,150,000 of these shares are exercisable within 60 days of August 19, 2010). The exercise price for all of the aforesaid options may be less than your cost to acquire our Common Stock. In the event of the exercise or conversion of these securities, you could suffer substantial dilution of your investment in terms of your percentage ownership in the company as well as the book value of your Common Stock. In addition, the holders of the common share purchase options may sell Common Stock in tandem with their exercise of those options to finance that exercise, or may resell the shares purchased in order to cover any income tax liabilities that may arise from their exercise of the options, which could substantially depress the prevailing market price of our stock. OUR ISSUANCE OF ADDITIONAL COMMON STOCK, OR OPTIONS TO PURCHASE OUR STOCK, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS. We are entitled under our articles of incorporation to issue up to 225,000,000 shares of capital stock which includes 175,000,000 shares of Common Stock, 25,000,000 shares of Series C Convertible Preferred Stock, 2,885,000 of Series B Convertible Preferred Stock and 22,115,000 undesignated shares. Our undesignated shares may be designated as in a senior position to our Common Stock. After taking into consideration our outstanding Common Stock at August 19, 2010, we will be entitled to issue up to 12,223,118 additional shares of Common Stock (175,000,000 authorized less shares outstanding of 92,868,374, 18,601,155 shares for issuance upon conversion of Series B and Series C Preferred Stock, 11,558,974 additional shares reserved for issuance to Fusion Capital, 13,930,256 shares reserved for issuance of stock options, 20,383,078 shares reserved for issuance of Common Stock purchase warrants, 4,864,582 shares reserved for placement agent warrants, 547,009 allocable commitment fee shares and 23,454 shares reserved for payment of dividends) and up to 31,348,845 shares of undesignated capital stock. Our board of directors may generally issue stock, or options or warrants to purchase those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time. It is likely that we will be required to issue additional securities to raise capital to further our development. It is also likely that we will be required to issue additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue additional shares of Common Stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time. THE LIMITATION OF MONETARY LIABILITY OF OUR DIRECTORS, OFFICERS AND EMPLOYEES UNDER OUR ARTICLES OF INCORPORATION AND THE INDEMNIFICATION RIGHTS OF OUR DIRECTORS, OFFICERS, CONSULTANTS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS, OFFICERS, CONSULTANTS AND EMPLOYEES. Our articles of incorporation contain provisions which eliminate the liability of our directors for monetary damages to the Company and shareholders. Our bylaws also require us to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements with our directors, officers, consultants and employees. The foregoing indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers, consultants and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors, officers, consultants and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers, consultants and employees even though such actions, if successful, might otherwise benefit the Company and shareholders. ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY. Certain provisions of the Minnesota Business Corporation Act and other Minnesota laws have anti-takeover effects and may inhibit a non-negotiated merger or other business combination. These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval of, our Board of Directors in connection with such a transaction. However, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which the shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act ) and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends and market estimates in our industry, (d) our future financing plans, (e) our anticipated needs for working capital and expectations with respect to capital expenditures, (f) management s assumptions regarding costs related to regulatory compliance, (g) our sales and marketing strategy in certain market segments, (h) our expectations with respect to legislative trends in the industries in which we operate, and (i) modifications to our San Diego facility.

parsed_sections/risk_factors/2010/CIK0000742054_cadence_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS There are many risks and uncertainties related to our business and operations and an investment in shares of our common stock. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all other information contained or incorporated by reference in this prospectus, including our financial statements and the related notes, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and the risks we have highlighted in other sections of this prospectus. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us at this time or that we currently deem immaterial also may adversely affect our business, financial condition and operations. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed. See Cautionary Note Regarding Forward-Looking Statements. Risks Related to Our Business The current economic environment poses significant challenges for us and our industry and could adversely affect our financial condition and results of operations. We are operating in a challenging and uncertain economic environment, including generally uncertain national and local conditions. Financial institutions like us continue to be affected by declines in the real estate market and constrained financial markets. Declines in the housing market, beginning in 2008 through today, including falling home prices and increasing delinquencies, foreclosures and unemployment, have resulted in significant write-downs of asset values by many financial institutions, including us. Continued concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their clients and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of consumer confidence, increased market volatility and widespread reduction in general business activity. Many financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition and results of operations. For example, a deepening national economic recession or further deterioration in local economic conditions in the southeastern United States could cause losses that exceed our allowance for loan losses. We cannot predict when economic conditions are likely to improve. We may also face additional risks in connection with the current economic environment, including the following: Economic conditions that negatively affect housing prices and the job market have caused, and may continue to cause, the credit quality of our loan portfolios to deteriorate, and that deterioration in credit quality has had, and could continue to have, a negative effect on our business. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities. The processes we use to estimate our allowance for loan losses and reserves may no longer be reliable because market conditions can change rapidly. The value of our securities portfolio may decline. We face increased regulation of our industry, and compliance with that regulation has increased our costs and increased compliance challenges and may continue to do so. As these conditions or similar ones continue to exist or worsen, we could experience continuing or increased adverse effects on our financial condition and results of operations. Table of Contents We are heavily regulated, and that regulation could limit or restrict our activities and adversely affect our earnings. We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies, including the OCC, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (the FDIC ), and to a limited degree, the regulators in the states in which our branches are located. Our compliance with these regulations is costly and may restrict some of our activities, including payment of dividends (which are restricted, as discussed below), mergers and acquisitions, investments, loans and interest rates and locations of offices. As further discussed below, we are also subject to capitalization guidelines established by our regulators, which require us to maintain certain higher levels of capital to support our business. In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. New legislative proposals continue to be introduced in the U.S. Congress that could substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including with respect to compensation, interest rates and the effect of bankruptcy proceedings on consumer real property mortgages. Further, federal and state regulatory agencies may adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulation to us. Compliance with current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance. Additionally, evolving regulations concerning executive compensation may impose limitations on us that affect our ability to compete successfully for executive and management talent. The Obama Administration issued a white paper, Financial Regulatory Reform A New Foundation: Rebuilding Financial Supervision and Regulation, that provides recommendations for overhauling the nation s financial regulatory system in the wake of the global financial crisis. The plan urged Congress and regulators to adopt sweeping changes to financial sector regulation and oversight, dramatically increasing the federal government s role in nearly every aspect of the financial markets. The House of Representatives passed legislation in December 2009 that is largely modeled on the administration s white paper. On May 20, 2010, the Senate passed its own financial reform bill and the two measures are headed to conference. Leaders of both political parties have indicated a desire to complete final legislation shortly. If the currently proposed or similar legislation is adopted, it will result in additional restrictions, oversight or costs that may have an adverse effect on our business, results of operations or the price of our common stock. In addition, given the current economic and financial environment, our regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of the regulations and laws and their interpretation of the quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency s assessment of the quality of our assets differs from our assessment, we may be required to take additional charges that would have the effect of materially reducing our earnings, capital ratios and stock price. The consent order with the OCC requires us to take certain actions that could restrict our operations and may restrict our ability to leverage our capital into earnings. On May 19, 2010, the Bank s board of directors executed a stipulation and consent to the issuance of a consent order by the OCC, and the OCC issued a consent order to the Bank effective as of such date . Such Table of Contents consent order requires the Bank to meet and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk-based capital ratio of 12%. As a result of the consent order, the Bank is not deemed to be well capitalized under the applicable regulations as long as the consent order is in place. Because the Bank also is deemed to be in troubled condition, the Bank is required, among other things, to obtain OCC or FDIC approval before making severance payments to departing executives, adding new directors or senior officers or making any change in responsibilities of any current senior executive officer who is proposing to assume a different senior officer position. Additionally, the Bank is required to seek FDIC approval before it can accept, renew or roll over brokered deposits or pay a dividend and it will not be eligible for expedited processing of certain applications. The Bank s regulators have considerable discretion in whether to grant required approvals, and we may not be able to obtain approvals if requested. The consent order also includes other operational and supervisory provisions. The consent order requires us to take certain actions and to implement certain action plans with respect to, among other things, a compliance committee, capital adequacy, strategic planning and capital planning, management competence and effectiveness, loan portfolio management, credit and collateral exceptions, other real estate owned, loan review, the allowance for loan and lease losses, criticized assets, credit concentration risk management, liquidity risk management, internal audit, and the correction of alleged legal violations identified in examination reports. The minimum capital ratios for the Bank under the consent order may restrict our ability to leverage our capital into earnings. Additionally, if the Bank fails to comply with the requirements of such consent order, it may be subject to further regulatory action, including a requirement to prepare a plan to sell or merge the Bank. Moreover, the imposition of the consent order with the OCC could cause reputational damage to the Bank and could result in a loss of deposits, thereby reducing liquidity and reducing our ability to leverage our capital into earnings. The OCC also has broad authority to take additional actions against the Bank, including assessing civil fines and penalties, issuing additional consent or cease and desist orders, removing officers and directors, and appointing the FDIC to take control of the Bank. We are required to maintain higher capital levels than many other banks and our failure to comply with these higher capital ratios could lead to the OCC taking additional actions against the Bank. The consent order requires the Bank to meet and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk-based capital ratio of 12%. After successfully completing this offering, we expect to exceed these required capital ratios. If we do not maintain these required minimum capital ratios, the OCC has broad authority to take additional actions against the Bank, including assessing civil fines and penalties, issuing additional consent or cease and desist orders, removing officers and directors and appointing the FDIC as receiver of the Bank. The sale of common stock in this offering will likely result in an ownership change as defined for U.S. federal income tax purposes. In the event of an ownership change, our ability to utilize fully a significant portion of our U.S. federal and state tax net operating losses and certain built-in losses that have not been recognized for income tax purposes could be impaired as a result of the operation of Section 382 of the Internal Revenue Code of 1986, as amended. Our ability to use certain realized net operating losses and unrealized built-in losses to offset future taxable income may be significantly limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the Code ). An ownership change occurs whenever the percentage of the stock of a corporation owned, directly or indirectly, by 5-percent shareholders (within the meaning of Section 382 of the Code) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. The amount of taxable income in each taxable year after the ownership change that may be offset by pre-change net operating losses and certain other pre-change tax attributes is generally limited to the product of (a) the fair market value of the corporation s outstanding stock immediately prior to the ownership change and (b) the long-term tax exempt rate, a rate of interest established by the Internal Revenue Service that Table of Contents fluctuates from month to month. The annual limitation may be increased each year to the extent that there is an unused limitation in a prior year. Following the completion of this offering, we anticipate that this Section 382 limitation will be triggered given our current low market capitalization, the large size of this offering relative to our current market capitalization, the fact that we do not currently have any 5-percent shareholders and the likelihood that this offering will result in a number of shareholders with ownership percentage greater than 5-percent individually. Because of the regulatory implications associated with owning more than 10 percent of the stock of a bank holding company, it is our expectation that no person or investor will exceed 9.9 percent ownership upon the consummation of the offering. As a result, we currently do not expect any material changes in the Company s corporate governance following the consummation of the offering. If an ownership change under Section 382 occurs, the value of our existing deferred tax assets for net operating loss carry-forwards, along with a portion of future losses deemed net unrealized built-in losses at the time of the ownership change, may not be available to reduce taxable income in the future. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation effectively provides a cap on the cumulative amount of pre-change losses and certain post-change recognized built-in losses that may be utilized to reduce future taxable income. As a result, deferred tax assets reflected on our balance sheet related to these future tax benefits that will no longer be realized must be impaired. In addition, GAAP requires us to establish a valuation allowance to reduce our deferred tax assets by the amount that will not be utilized over our forecast horizon. Because no significant valuation allowance currently exists for substantially the full amount of our deferred tax assets, an additional charge to earnings in that amount would result. Based on the closing price of $1.75 as of May 27, 2010, we estimate that our deferred tax assets would be permanently impaired by approximately $1.0 million as a result of the fact that we will not be able to utilize this portion of our deferred tax assets during the 20 year carry-forward period. We also expect a valuation allowance of approximately $14.8 million against our remaining deferred tax assets. This will reduce our current level of retained earnings. While we expect to recover this valuation reserve in the future based on our operating performance, we can give no assurance that we will be able to recover such amount. See Capitalization on page 27 for the impact on our capital of these changes. The impairment and valuation allowance outlined above are management s best current estimates. Any actual Section 382 limitation and adjustments to our retained earnings or deferred tax assets will be based on the fair market value of the Company s outstanding stock immediately prior to the ownership change as well as our future operating performance. In addition, in the event the Company has additional losses after the ownership change, the Company may not be able to realize the tax benefits of such losses resulting in lower earnings than we otherwise would have reported and a greater reduction of capital than if we had the full tax benefit. We have a significant deferred tax asset and cannot assure that it will be fully realized. We had net deferred tax assets of $31.4 million as of March 31, 2010. As of March 31, 2010, we have a valuation allowance of $651 thousand established against our state deferred tax asset. This was established due to differences in the carryforward periods in state and federal tax laws. In evaluating the need for a valuation allowance, we estimated future taxable income based on management approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. Even in the absence of an ownership change under Section 382 of the Code as described above, if future events differ significantly from our current forecasts, we may need to establish a valuation allowance, which would have a material adverse effect on our results of operations and financial condition at the Bank. Our loan portfolio is highly concentrated in commercial real estate in certain geographic areas. Commercial real estate and farm loans totaled $590.8 million as of March 31, 2010. Additionally, construction and development loans totaled $156.4 million as of March 31, 2010. As of March 31, 2010, approximately 73.5% of our loans had real estate as a primary or secondary component of collateral. Our Table of Contents construction and development loan portfolio includes residential and non-residential construction and development loans. Our residential construction and development portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. Our non-residential construction and development portfolio consists mainly of loans for the construction and development of office buildings, hotels, and other non-residential commercial properties. Our commercial real estate and farm loan portfolio consists primarily of loans secured by office buildings, retail centers, warehouses, farm land and other commercial properties located primarily in our Mississippi, Memphis, Florida, Tuscaloosa and Nashville market areas. Commercial real estate loans are typically larger than residential real estate loans and consumer loans and depend on sales, in the case of construction and development loans, and cash flows, in the case of other commercial real estate loans, from the property to service the debt. Sales and cash flows have been and may continue to be affected significantly by general economic conditions, and a further deterioration in the markets where our collateral is located could increase the likelihood of default. Because our loan portfolio contains a significant number of commercial real estate loans with relatively large balances, the deterioration of a few of these loans has caused and could continue to cause a significant increase in our non-performing loan balances. The concentration of residential construction and development in our commercial real estate loan portfolio is a contributing factor that led to our entry into a consent order with the OCC. A further increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations. Additionally, the consent order requires us to implement additional policies and procedures with respect to our commercial real estate loan portfolio that could result in additional costs to us or restrict our business in a manner that could have a material adverse effect on our results of operations. Our allowance for loan losses may not be adequate to cover actual losses. If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease. Management maintains an allowance for loan losses based upon, among other things: historical experience; an evaluation of local, regional and national economic conditions; regular reviews of delinquencies and loan portfolio quality; collateral evaluations; current trends regarding the volume and severity of past due and problem loans; the existence and effect of concentrations of credit; results of regulatory examinations; and from time to time, the advice of consultants. Based on those factors, management makes various assumptions and judgments about the ultimate collectibility of the respective loan portfolios. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, the consent order requires our board of directors to review our allowance for loan losses at least quarterly and the OCC periodically reviews our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs. The OCC judgments may differ from those of our management and they may require us to increase our allowance for our loan losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, which may be beyond our control, including changes in interest rates, and these losses may exceed current estimates. While we believe that the allowance for loan losses is adequate to cover current losses, we cannot provide assurances that we will not need to increase our allowance for loan losses or that regulators will not require an increase in our allowance. Either of these occurrences could materially and adversely affect our financial condition and results of operations. Table of Contents We have incurred significant losses and may incur additional losses. We incurred a net loss of $1.9 million, or $0.16 per share, for the quarter ended March 31, 2010, and a net loss of $112.2 million, or $9.42 per share, for the year ended December 31, 2009. These losses, excluding the impact of the impairment loss on goodwill of $66.5 million in 2009, have resulted primarily from losses in our loan portfolio and we may suffer additional losses in the future. Our continued participation in the Capital Purchase Program may adversely affect our ability to retain customers, attract investors, compete for new business opportunities and retain high performing employees. Several financial institutions which participated in the CPP, received approval from the U.S. Department of the Treasury (the U.S. Treasury ) to exit the program. These institutions have, or are in the process of, repurchasing the preferred stock and repurchasing or auctioning the warrant issued to the U.S. Treasury as part of the CPP. We have not requested approval to repurchase the preferred stock and warrant from the U.S. Treasury. In order to repurchase one or both securities, in whole or in part, we must establish that we have satisfied all of the conditions to repurchase, including the consent of the OCC, and there can be no assurance that we will be able to repurchase these securities from the U.S. Treasury. Our customers, employees, counterparties in our current and future business relationships, and the media may draw negative implications regarding our strength as a financial institution based on our continued participation in the CPP following the exit of one or more of our competitors or other financial institutions. Any such negative perceptions may impair our ability to effectively compete with other financial institutions for business. In addition, because we have not repurchased the U.S. Treasury s CPP investment, we remain subject to the restrictions on incentive compensation contained in the American Recovery and Reinvestment Act of 2009 (the ARRA ). Financial institutions which have repurchased the U.S. Treasury s CPP investment are relieved of the restrictions imposed by the ARRA and its implementing regulations. Due to these restrictions, we may not be able to successfully compete with financial institutions that have repurchased the U.S. Treasury s investment to retain and attract high performing employees. If this were to occur, our business, financial condition and results of operations may be adversely affected, perhaps materially. Further deterioration of local economic conditions where we operate could have a continuing negative effect on us. Our success depends significantly on the general economic conditions of the geographic markets we serve in the states of Alabama, Florida, Georgia, Mississippi and Tennessee. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. As a consequence of the difficult economic environment, we experienced losses, resulting primarily from significant provisions for loan losses. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve in the near term, in which case we could continue to experience losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges. Adverse changes in, and further deterioration of, the economic conditions of the Southeastern United States in general or any one or more of our local markets could negatively affect our financial condition, results of operations and our profitability. A continuing deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decline; and collateral for loans we make, especially real estate, may decline in value, in turn reducing a client s borrowing power, and reducing the value of assets and collateral associated with our loans. Table of Contents Liquidity needs could adversely affect our results of operations and financial condition. The Bank s primary sources of funds are client deposits, maturing or called securities and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors outside of our control, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Those sources include federal funds lines of credit from correspondent banks and, under certain circumstances, borrowing from the Federal Reserve s discount window. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if regulatory restrictions should limit their availability. We may be required to slow or discontinue capital expenditures or other investments or liquidate assets should those sources not be adequate. The financial services industry faces substantial litigation and legal liability risks. We have been named, from time to time, as a defendant in various legal actions, including arbitrations and other litigation arising in connection with our activities. Threatened legal actions could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Any substantial legal liability resulting from litigation could materially and adversely affect our business, financial condition or results of operations. Emergency measures designed to stabilize the U.S. banking system are beginning to wind-down. Since mid-2008, a host of legislation and regulatory actions have been implemented in response to the financial crisis and the recession. Some of the programs are beginning to expire and the impact of the wind-down of these programs on the financial sector, including our counterparties, and on the economic recovery is unknown. TARP, established pursuant to the EESA legislation, was scheduled to expire on December 31, 2009; however, the U.S. Treasury has announced that it will be extended until October 31, 2010. TARP includes the CPP, pursuant to which the U.S. Treasury is authorized to purchase senior preferred stock and warrants to purchase common stock of participating financial institutions. Also under TARP, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments, from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Recent indications from the U.S. Treasury are that TARP funds may be used to stimulate small business lending and to support mortgage loan modification efforts. The U.S. Treasury guarantee on money market mutual funds established on September 19, 2008, expired on September 18, 2009, and the U.S. Treasury did not extend the program. On September 9, 2009, the FDIC issued a notice of proposed rulemaking requesting comments on whether a temporary emergency facility should be left in place following the expiration on October 31, 2009 of the Temporary Liquidity Guarantee Program (the TLG Program), which guaranteed certain senior unsecured debt of banks and certain holding companies. The Transaction Account Guarantee portion of the program, which guarantees noninterest bearing bank transaction accounts on an unlimited basis, is scheduled to continue until December 31, 2010. Since 2008, the Federal Reserve has purchased several billion dollars of mortgage-related assets in order to support the mortgage lending industry during the financial crisis. The Federal Reserve is beginning to reduce its balance sheet as the financial crisis appears to abate, with the result that the supply of mortgage related assets on the market may increase substantially. Table of Contents As part of its response to the financial crisis, the Federal Reserve has maintained interest rates at historically low levels. The chairman of the Federal Reserve has indicated that rates will remain low at least for several months in 2010, but an increase in rates could occur in the coming year. In addition, a stall in the economic recovery or a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock. Changes in monetary policy and interest rates could adversely affect our profitability. Our results of operations are affected by decisions of monetary authorities, particularly the Federal Reserve. Our profitability depends to a significant extent on our net interest income. Net interest income is the difference between income generated from interest-earning assets and interest expense on funding those assets. Our net interest income has declined in recent periods due to a decline in interest rates. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but those changes could also affect our ability to originate loans and obtain deposits, and the average duration of our mortgage-backed securities portfolio. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Changes in interest rates could also adversely affect the income of some of our noninterest income sources. For example, if mortgage interest rates increase, the demand for residential mortgage loans will likely decrease, which will have an adverse effect on our mortgage loan fee income. Declines in security values could further reduce our trust and investment income. In light of changing conditions in the national economy and in the financial markets, particularly the uncertain economic environment, the continuing threat of terrorist acts and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, which may negatively affect our deposit levels, our loan demand and our business and earnings. Furthermore, the actions of the United States and other governments in response to ongoing economic crisis may result in currency fluctuations, exchange controls, market disruption and other adverse effects. Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition. Non-performing assets adversely affect our net earnings in various ways. Although we believe the economy has stabilized and begun improving in some respects, we expect to continue to incur provisions for loan losses relating to non-performing loans. We generally do not record interest income on non-performing loans or other real estate owned, thereby adversely affecting our earnings, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of non-performing assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience future increases in non-performing assets. Table of Contents We face regulatory risks related to our commercial real estate loan concentrations. Commercial real estate is cyclical and poses risks of possible loss due to concentration levels and similar risks of the asset class. The consent order requires us to implement improved underwriting, internal controls, risk management policies and portfolio stress testing. Regulators may also require higher levels of provisions for possible loan losses and capital levels as a result of our commercial real estate lending concentration and exposures. In addition, much recent media and regulatory attention has been based on the further deterioration of commercial real estate loans held by banks experienced in recent months, and we face the risk that our commercial real estate loan portfolio may continue to experience significant losses going forward. Changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact our financial statements. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. Our financial condition and outlook may be adversely affected by damage to our reputation. Our financial condition and outlook is highly dependent upon perceptions of our business practices and reputation. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, disclosure, sharing or inadequate protection of customer information and from actions taken by government regulators and community organizations in response to that conduct. Damage to our reputation could give rise to legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Additionally, reputational damage could result in a loss of deposits, thereby reducing liquidity and reducing our ability to leverage our capital into earning. The failures of other financial institutions could adversely affect us. Our ability to engage in routine funding transactions could be adversely affected by the actions and potential failures of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with a variety of counterparties in the financial services industry. As a result, defaults by, or even rumors or concerns about, one or more financial institutions with whom we do business, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Our credit risk may be exacerbated when the collateral we hold cannot be sold at prices that are sufficient for us to recover the full amount of our exposure. In addition, failures of other financial institutions, and in particular, the failure of community banks, could damage our reputation and credibility. Any such losses or damage to our reputation could materially and adversely affect our financial condition and results of operations. Diminished access to alternative sources of liquidity could adversely affect our net income, net interest margin and our overall liquidity. We have historically had access to a number of alternative sources of liquidity, but given the dramatic downturn in the credit and liquidity markets, there is no assurance that we will be able to obtain such liquidity on terms that are favorable to us, or at all. For example, the cost of out-of-market deposits could exceed the cost of Table of Contents deposits of similar maturity in our local market area, making them unattractive sources of funding; financial institutions may be unwilling to extend credit to banks because of concerns about the banking industry and the economy generally; and, given recent downturns in the economy, there may not be a viable market for raising equity capital. If our access to these sources of liquidity is diminished, or only available on unfavorable terms, then our net interest margin and our overall liquidity likely could be adversely affected. In addition, under the consent order we must obtain a waiver from the FDIC prior to accepting, renewing or rolling over brokered deposits. We may be required to pay significantly higher FDIC premiums in the future. Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years. Additionally, the Emergency Economic Stabilization Act temporarily increased the limit on FDIC coverage to $250,000 through December 13, 2010. The FDIC may raise the premiums even higher in the future. Therefore, the reserve ratio may continue to decline, and there may be additional increases in FDIC premiums. In 2009, the Bank (together with all other insured depository institutions) was required to pre-pay three years of insurance premiums. We are a bank holding company and depend on our subsidiaries for dividends, distributions and other payments. The Company is a legal entity separate and apart from the Bank, and we must provide for our own liquidity. Substantially all of our revenues are obtained from dividends declared and paid by the Bank. The Bank s ability to declare and pay dividends is limited by the consent order. The consent order provides that the Bank may not pay a dividend or make a capital distribution unless it is approved by the OCC and the Bank is in compliance with its capital plan. The Federal Reserve has issued policy statements generally requiring insured banks and bank holding companies to pay dividends only out of current operating earnings and we do not anticipate paying dividends on our common stock in the near future. In addition, if any of the Company s subsidiaries become insolvent, the direct creditors will have a prior and superior claim on its assets. The Company s rights and the rights of the Company s creditors will be subordinate to such direct creditors claims. Additionally, if the Bank becomes subject to federal conservatorship or receivership, the Company would probably suffer a complete loss of the value of our ownership interest in the Bank, and we subsequently may be exposed to significant claims by the FDIC and OCC. Our inability to hire or retain key professionals, management and staff could adversely affect our revenues and net income. We rely on key personnel to manage and operate our business, including major revenue generating functions such as the loan and deposit portfolios. The ARRA has imposed significant limitations on executive compensation for recipients, like us, which may make it more difficult for us to retain and recruit key personnel. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our results of operations. An interruption or breach in security with respect to our information systems, as well as information systems of our outsourced service providers, could have a material adverse effect on our financial condition and results of operations. We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security with respect to our information systems, as well as information systems of our outsourced service providers, could damage our reputation, result in a loss of client business, subject us to Table of Contents additional regulatory scrutiny, or expose us to civil litigation, any of which could result in failures or disruptions in our client relationship management, general ledger, deposit, loan and other systems resulting in a material adverse effect on our financial condition and results of operations. Hurricanes and other natural disasters may adversely affect loan portfolios and operations and increase the cost of doing business. We operate and make loans in the state of Florida, which is viewed as a hurricane-prone area. Hurricanes destroy collateral and the service businesses that support the area, and may affect the demand for houses and services in a hurricane-prone area. Our results could be adversely affected if we suffered higher than expected losses on our loans due to weather events. Risks Related to Investing in Our Common Stock The trading volume in our common stock has been low, and the sale of a substantial number of shares in the public market could depress the price of our stock and make it difficult for you to sell your shares. Although our common stock is listed on The NASDAQ Global Select Market, it is thinly traded. Thinly traded stock can be more volatile than stocks trading at higher volumes. We cannot predict the trading volume of our common stock after this offering. We cannot predict the effect of future sales of our common stock in the market, or the availability of shares of our common stock for sale in the market, on the market price of our common stock. Therefore, we cannot assure you that sales of substantial amounts of our common stock, or the potential for large amounts of market sales, would not cause the price of our common stock to decline. Following this offering, we expect to have approximately 57,625,850 shares of common stock outstanding (or 64,482,993 shares of common stock outstanding if the underwriters exercise their over-allotment option in full) based upon 11,911,564 shares of common stock outstanding as of May 27, 2010. If our stock price of our common stock fluctuates after this offering, you could lose a significant part of your investment. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described above in Risk Factors Risks Related to Our Business and the following: general economic and stock market conditions; actions taken by the regulators of the Company and the Bank; risks related to our business and our industry, including those discussed above; changes in conditions or trends in our industry, markets or clients; strategic actions by us or our competitors; announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments; variations in our quarterly operating results and those of our competitors; future sales of our common stock or other securities; investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives; and continuing threats of terrorist acts. As a result of these factors, investors in our common stock may not be able to resell their shares at or above the offering price or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price Table of Contents volatility may be greater if the public float and trading volume of our common stock is low. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to operating performance. The market price of our common stock may decline after this offering. We are currently offering for sale 45,714,286 shares of our common stock (52,571,429 shares of common stock if the underwriters exercise their over-allotment option in full). The possibility that substantial amounts of shares of our common stock may be sold in the public market may cause prevailing market prices for our common stock to decrease. Additionally, because stock prices generally fluctuate over time, there is no assurance that purchasers of common stock in the offering will be able to sell shares after the offering at a price equal to or greater than the actual purchase price. Purchasers should consider these possibilities in determining whether to purchase shares of common stock and the timing of any sale of shares of common stock. The rights of holders of our common stock to receive liquidation payments and dividend payments are junior to our existing and future indebtedness, our Series A preferred stock and to any senior securities we may issue in the future, and our ability to declare dividends on the common stock is currently limited. Shares of the common stock are equity interests in the Company and do not constitute indebtedness. As such, shares of the common stock will rank junior to all current and future indebtedness and other non-equity claims on the Company with respect to assets available to satisfy claims on the Company, including in a liquidation of the Company. The Company may, and the Bank and our other subsidiaries may also, incur additional indebtedness from time to time and may increase our aggregate level of outstanding indebtedness. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of any holders of our Series A preferred stock then outstanding. Under the terms of the CPP, for so long as any Series A preferred stock issued under the CPP remains outstanding, we are prohibited from increasing dividends on our common stock, and from making some repurchases of equity securities, including our common stock, without the U.S. Treasury s prior consent until the third anniversary of the U.S. Treasury s investment or until the Series A preferred stock has been redeemed in whole or the U.S. Treasury has transferred all of the Series A preferred stock it purchased under the CPP to third parties. Furthermore, as long as the Series A preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to some equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on the Series A preferred stock, subject to limited exceptions. In addition to the Series A preferred stock we issued to the U.S. Treasury, our board of directors is authorized to cause us to issue additional classes or series of preferred stock without any action on the part of the shareholders. If we issue preferred shares in the future that have a preference over our common stock with respect to the payment of dividends or upon liquidation, or if we issue preferred shares with voting rights that dilute the voting power of the common stock, then the rights of holders of our common stock or the market price of our common stock could be adversely affected. The ability of the Company to pay dividends is also limited by regulatory restrictions and the need to maintain sufficient consolidated capital. In addition, the ability of the Bank to pay dividends to the Company is limited by the Bank s obligations to maintain sufficient capital, by the consent order, which requires us to obtain prior regulatory approval, and by other general restrictions on dividends that are applicable to national banks regulated by the OCC. Holders of our common stock are only entitled to receive the dividends that our board of directors may declare out of funds legally available for those payments. Although we have historically paid cash dividends on our common stock, we are not required to do so. On May 5, 2009, our board of directors voted to suspend paying Table of Contents cash dividends until further notice. We cannot assure you that we will resume paying dividends in the future. This could adversely affect the market price of our common stock. Also, as discussed above, we are a bank holding company and our ability to declare and pay dividends depends in part on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. The preferred stock sold to the U. S. Treasury impacts net income (loss) available to our common shareholders, and the warrant may be dilutive to our common shareholders. On January 9, 2009, we completed the sale of $44 million of Series A preferred stock to the U. S. Treasury under the CPP. These Series A preferred shares pay a cumulative annual dividend at a 5% rate for the first five years and will reset to a rate of 9% after five years if not redeemed by us prior to that time. In connection with the issuance of the Series A preferred shares, we also issued to the U. S. Treasury a warrant to purchase our common stock up to a maximum of 15% of the Series A preferred amount, or $6.6 million. Such capital has increased our equity. In addition, the dividends declared and the accretion of discount on the senior preferred shares reduces the net income available to our common shareholders and earnings per common share. The Series A preferred shares will also receive preferential treatment in the event of our liquidation, dissolution or winding up. Additionally, the ownership interest of our existing common shareholders will be diluted to the extent the warrant we issued to the U. S. Treasury is exercised. We may not be permitted to repurchase the U. S. Treasury s CPP investment if and when we request approval to do so. While it is our plan to repurchase the securities sold to the U. S. Treasury, in whole or in part, as soon as is practicable, we must establish to our regulators satisfaction that we have satisfied all of the conditions to repurchase and must obtain the approval of the Federal Reserve and the U. S. Treasury. There can be no assurance that we will be able to repurchase the U. S. Treasury s investment in our Series A preferred stock. In addition to limiting our ability to return capital to our shareholders, the U. S. Treasury s investment could limit our ability to retain key executives and other key employees, and limit our ability to develop business opportunities. If we are unable to repurchase the U. S. Treasury s investment after five years, the cost of this capital will increase substantially. If we are unable to redeem the Series A preferred shares sold to the U. S. Treasury prior to January 9, 2014, the cost of this capital will increase substantially on that date, from 5.0% per annum to 9.0% per annum. Depending on our financial condition at the time, this increase in the annual dividend rate on the senior preferred shares could have a material negative effect on our liquidity. An entity holding as little as a 5% interest in our outstanding securities could, under certain circumstances, be subject to regulation as a bank holding company. Any entity, including a group composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a controlling influence over us, may be subject to regulation as a bank holding company in accordance with the Bank Holding Company Act of 1956, as amended (the BHC Act ). In addition, (a) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve under the BHC Act to acquire or retain 5% or more of our outstanding securities and (b) any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve under the Change in Bank Control Act to acquire or retain 10% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company Table of Contents could require the holder to divest all or a portion of the holder s investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking. Anti-takeover provisions in our charter documents could discourage, delay or prevent a change of control of our company and diminish the value of our common stock. Some of the provisions of our restated articles of incorporation, as amended, and amended and restated bylaws could make it difficult for our shareholders to change the composition of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our shareholders may consider favorable. See Description of Capital Stock. These provisions include: authorizing our board of directors to issue preferred shares without shareholder approval; prohibiting cumulative voting in the election of directors; and requiring the approval of 75% of our shareholders to approve any merger or sale of assets not recommended by the board of directors of the Company. These anti-takeover provisions could impede the ability of our common shareholders to benefit from a change of control and, as a result, could have a material adverse effect on the market price of our common stock and your ability to realize any potential change-in-control premium. We have broad discretion in using/applying the net proceeds from this offering and could be adversely affected if we fail to use the funds effectively. We intend to use the net proceeds from this offering for general corporate purposes, including the contribution of a portion of the proceeds to the Bank as additional capital to allow the Bank to reach the OCC s mandated capital ratios. We will have significant flexibility in applying the net proceeds of this offering. Our failure to apply these funds effectively could adversely affect our business by reducing our return on equity and inhibiting our abilities to expand and/or raise additional capital in the future. A shareholder s investment is not an insured deposit. An investment in our common stock is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency. Your investment in our common stock will be subject to investment risk and you may lose all or part of your investment. Table of Contents

parsed_sections/risk_factors/2010/CIK0000788206_empire_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ Risks related to the oil and gas industry Special Exploration License 13/98 expired September 30, 2009 and continuing Exploration License applications have not yet been granted. By its terms, Special Exploration License 13/98 expired September 30, 2009. The Company, with and through its subsidiary, Great South Land Minerals, LTD lodged an application for an Exploration License covering the significant identified prospective areas included in the SEL 13/98 effort and lodged an additional application for a Special Exploration License for additional land and offshore areas of Tasmania. These license applications have not yet been formally awarded by Mineral Resources Tasmania. The Company believes Special Exploration License 13/98 provides a right to the award of the exploration license over selected areas covered by that license and continues to work for and plan for the reissuance. Award of the Special Exploration License is at the discretion of the Minister but the Company believes its performance over past years support the issuance of the new license. As a result, if the license is not granted, we may not recover any or all of our investment related to acquisition and exploration costs incurred and we would be forced to write-off the capitalized costs which would have a significant and adverse impact on both our financial position and results of operations. We may not be able to meet our substantial capital requirements. Our business is capital intensive. We must invest a significant amount in development and exploration activities. We are currently making and intend to continue to make substantial capital expenditures to find, develop and produce natural gas and oil reserves. If our capital resources diminish, we may not be able to meet the exploration expenditure requirements of our petroleum licenses thus voiding the licenses. The licenses, applications for additional licenses and information gathered on the licensed property are our most important assets and any loss would result in a substantial decrease in our ability to eventually become a profit-generating company. Even if we acquire sufficient financing to meet the license expenditures, we may not be able to expend the capital necessary to undertake or complete future drilling programs or acquisition opportunities unless we raise additional funds through debt or equity financings. We may not be able to obtain debt or equity financing to meet our capital requirements. Moreover, our future cash flow from operations may not be sufficient for continued exploration, development or acquisition activities, and we may not be able to obtain the necessary funds from other sources. We anticipate future losses and negative cash flow. We have experienced negative cash flow from our operations and exploration and development activities in Tasmania since inception. We are strictly in the exploration phase and have no proven petroleum reserves. We expect to continue to incur significant expenditures over the next several years with our operations and development activity, including further seismic studies and exploratory and development drilling. Based on the exploration results to date, we anticipate that the cost per commercial well, if further results justify attempts at commercial drilling, would be no less than US$ 3.5 million each. New investors may require participation interests which could decrease future profitability. The pace of exploration and development activity may be determined by the amount of funding available. If funding is limited, exploration and development may be continued under agreements that provide investors with a participation interest in a particular property held by us. Under this type of arrangement, an investor would invest in a specific property and receive a negotiated interest in that specific property. This could reduce the potential profitability of the remaining interest in the property and reduce our ability to control and manage the property. The success of our business depends upon our ability to find, develop and acquire oil and gas reserves. We expect to find reserves of gas and oil that can be profitably exploited. There is, however, no guarantee that we will find reserves that will be economically feasible. Future drilling activities could subject us to many risks, including the risk that we will not find commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry wells, but also from productive wells that do not produce sufficient revenues to return a profit. Also, title problems, weather conditions, governmental requirements and shortages or delays in the delivery of equipment and services can delay our drilling operations or result in their cancellation. The cost of drilling, completing and operating wells is often uncertain, and new wells may not be productive. As a result, we may not recover all or any portion of our investment. Moreover, if natural gas and oil prices decline, the amount of natural gas and oil we can economically produce may be reduced. Risks related to the oil and gas industry Special Exploration License 13/98 expired September 30, 2009 and continuing Exploration License applications have not yet been granted. By its terms, Special Exploration License 13/98 expired September 30, 2009. The Company, with and through its subsidiary, Great South Land Minerals, LTD lodged an application for an Exploration License covering the significant identified prospective areas included in the SEL 13/98 effort and lodged an additional application for a Special Exploration License for additional land and offshore areas of Tasmania. These license applications have not yet been formally awarded by Mineral Resources Tasmania. The Company believes Special Exploration License 13/98 provides a right to the award of the exploration license over selected areas covered by that license and continues to work for and plan for the reissuance. Award of the Special Exploration License is at the discretion of the Minister but the Company believes its performance over past years support the issuance of the new license. As a result, if the license is not granted, we may not recover any or all of our investment related to acquisition and exploration costs incurred and we would be forced to write-off the capitalized costs which would have a significant and adverse impact on both our financial position and results of operations. We may not be able to meet our substantial capital requirements. Our business is capital intensive. We must invest a significant amount in development and exploration activities. We are currently making and intend to continue to make substantial capital expenditures to find, develop and produce natural gas and oil reserves. If our capital resources diminish, we may not be able to meet the exploration expenditure requirements of our petroleum licenses thus voiding the licenses. The licenses, applications for additional licenses and information gathered on the licensed property are our most important assets and any loss would result in a substantial decrease in our ability to eventually become a profit-generating company. Even if we acquire sufficient financing to meet the license expenditures, we may not be able to expend the capital necessary to undertake or complete future drilling programs or acquisition opportunities unless we raise additional funds through debt or equity financings. We may not be able to obtain debt or equity financing to meet our capital requirements. Moreover, our future cash flow from operations may not be sufficient for continued exploration, development or acquisition activities, and we may not be able to obtain the necessary funds from other sources. We anticipate future losses and negative cash flow. We have experienced negative cash flow from our operations and exploration and development activities in Tasmania since inception. We are strictly in the exploration phase and have no proven petroleum reserves. We expect to continue to incur significant expenditures over the next several years with our operations and development activity, including further seismic studies and exploratory and development drilling. Based on the exploration results to date, we anticipate that the cost per commercial well, if further results justify attempts at commercial drilling, would be no less than US$ 3.5 million each. New investors may require participation interests which could decrease future profitability. The pace of exploration and development activity may be determined by the amount of funding available. If funding is limited, exploration and development may be continued under agreements that provide investors with a participation interest in a particular property held by us. Under this type of arrangement, an investor would invest in a specific property and receive a negotiated interest in that specific property. This could reduce the potential profitability of the remaining interest in the property and reduce our ability to control and manage the property. The success of our business depends upon our ability to find, develop and acquire oil and gas reserves. We expect to find reserves of gas and oil that can be profitably exploited. There is, however, no guarantee that we will find reserves that will be economically feasible. Future drilling activities could subject us to many risks, including the risk that we will not find commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry wells, but also from productive wells that do not produce sufficient revenues to return a profit. Also, title problems, weather conditions, governmental requirements and shortages or delays in the delivery of equipment and services can delay our drilling operations or result in their cancellation. The cost of drilling, completing and operating wells is often uncertain, and new wells may not be productive. As a result, we may not recover all or any portion of our investment. Moreover, if natural gas and oil prices decline, the amount of natural gas and oil we can economically produce may be reduced. Drilling new wells could result in new liabilities, which could endanger our interests in our properties and assets. There are risks associated with the drilling of oil and natural gas wells, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, craterings, sour gas releases, fires and spills. The occurrence of any of these events could cause substantial losses and impair our future operating results. Empire Energy may become subject to liability for pollution, blow-outs or other hazards. We intend to obtain insurance with respect to these hazards, but such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. The payment of such liabilities could reduce the funds available to us or could, in an extreme case, result in a total loss of our assets. Moreover, we may not be able to maintain adequate insurance in the future at rates that are considered reasonable. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations. Decommissioning costs may be substantial; unplanned costs could divert resources from other projects. We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production of oil and gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as decommissioning. We have not yet determined whether we will establish a cash reserve account for these potential costs in respect of any of our current properties or facilities, or if we will satisfy such costs of decommissioning from the proceeds of production in accordance with the practice generally employed in onshore and offshore oilfield operations. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business. We may not be able to effectively manage our growth, which may harm our profitability. Our strategy envisions expanding our business. If we fail to effectively manage our growth, our financial results could be adversely affected. Growth may place a strain on our management systems and resources. We must continue to refine and expand our business development capabilities, our systems and processes and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot assure you that we will be able to: expand our systems effectively or efficiently or in a timely manner; allocate our human resources optimally; identify and hire qualified employees or retain valued employees; or incorporate effectively the components of any business that we may acquire in our effort to achieve growth. If we are unable to manage our growth and our operations our financial results could be adversely affected by inefficiency, which could diminish our profitability. A decline in natural gas and oil prices may adversely affect our financial results. Revenues we generate from future operations would be highly dependent on the price of, and demand for, natural gas and oil. Even relatively modest changes in oil and natural gas prices may significantly change those revenues, results of operations, and cash flows. Historically, the markets for natural gas and oil have been volatile and are likely to continue to be volatile in the future. Prices for natural gas and oil may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control, such as: the domestic and foreign supply of natural gas and oil; the price of foreign imports; overall domestic and global economic conditions; political and economic conditions or hostilities in oil producing countries, including the Middle East and South America; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; the level of consumer product demand; weather conditions; domestic and foreign governmental regulations; development of alternate technologies; and the price and availability of alternative fuels. Competitive industry conditions may adversely affect our results of operations. As a prospective independent natural gas and oil producer, we face strong competition in all aspects of our business. Many of our competitors are large, well-established companies that have substantially larger operating staffs and greater capital resources than we do. These companies may be able to pay more for productive natural gas and oil properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial and human resources permit. We may incur substantial costs to comply with environmental and other governmental regulations. Our exploration and development activities are regulated extensively. We have made and will continue to make all necessary expenditures, both financial and managerial, in our efforts to comply with the requirements of environmental and governmental regulations. Increasingly strict environmental laws, regulations and enforcement policies and claims for damages to property, employees, other persons and the environment resulting from our activities could result in substantial costs and liabilities in the future. Foreign currency exchange rate fluctuations may affect our financial results. We expect to sell our oil and natural gas production under agreements that may be denominated in United States dollars and foreign currencies. Many of the operational and other expenses we incur may be paid in the local currency of the country where we perform our operations. As a result, fluctuations in the United States dollar against the local currencies in jurisdictions where we operate could result in unanticipated and material fluctuations in our financial results. Local operations may require funding that exceeds operating cash flow and there may be restrictions on expatriating proceeds and/or adverse tax consequences associated with such funding. We presently do not use derivatives to hedge changes in foreign currency. Our management team does not have extensive experience in public company matters, which could impair our ability to comply with legal and regulatory requirements. Our management team has had limited U.S. public company management experience or responsibilities, which could impair our ability to comply with legal and regulatory requirements, such as the Sarbanes-Oxley Act of 2002 and applicable federal securities laws including filing required reports and other information required on a timely basis. Our management may not be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal, regulatory compliance and reporting requirements imposed by such laws and regulations. Our failure to comply with such laws and regulations could lead to the imposition of fines and penalties and further result in the deterioration of our business. Going Concern and Liquidity may be concerns. We are in the exploration stage, devoting substantially all of our efforts to exploration and raising financing. We have substantially funded our operations with proceeds from the issuance of common stock. In the course of our exploration activities, we have sustained operating losses and expect such losses to continue for the foreseeable future. We will finance our operations primarily through cash and cash equivalents on hand, future financing from the issuance of debt or equity instruments and through the generation of revenues once commercial operations get underway. However, the Company has yet to generate any significant revenues and has no assurance of future revenues. To management s knowledge, no company has yet successfully developed sub-surface hydrocarbons in commercial quantities in Tasmania. Even if development efforts are successful, substantial time may pass before revenues are realized. Market risks The trading price of our common stock may be volatile. Our common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not an exchange. Trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on an exchange or NASDAQ. You may have difficulty reselling any of the shares that you purchase. We are not certain that a more active trading market in our common stock will develop, or if such a market develops, that it will be sustained. Sales of a significant number of shares of our common stock in the public market could result in a decline in the market price of our common stock, particularly in light of the illiquidity and low trading volume in our common stock. The trading price of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth herein, as well as our operating results, financial condition, general conditions in the oil and gas exploration and development industry, market demand for our common stock, various other events or factors both in and out of our control. In addition, the sale of our common stock into the public market upon the effectiveness of this registration statement could put downward pressure on the trading price of our common stock. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock. These fluctuations may have a negative effect on the market price of our common stock. We do not expect to pay dividends in the foreseeable future. We do not intend to declare dividends for the foreseeable future, as we anticipate that we may reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in our common stock. Applicable SEC rules governing the trading of penny stocks limit the liquidity of our common stock, which may affect the trading price of our common stock. Our common stock currently trades on the OTC Bulletin Board. Since our common stock continues to trade well below $5.00 per share, our common stock is considered a penny stock and is subject to SEC rules and regulations that impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination for the purchaser and receive the written purchaser s agreement to a transaction prior to purchase. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

parsed_sections/risk_factors/2010/CIK0000796655_ants_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ If we are unable to protect our intellectual property, our competitive position would be adversely affected. If we experience rapid growth, we will need to manage such growth well. Market acceptance of our products and services is not guaranteed and our business model is evolving. Our ANTs Compatibility Server ( ACS ) product is at an early stage and our business model is not well established. We will need to continue our product development efforts. We face rapid technological change. A failure to obtain additional financing in the future could prevent us from executing our business plan or operate as a going concern. ADDRESS AND TELEPHONE NUMBER The Company s headquarters are located at 71 Stevenson Street, Suite 400, San Francisco, CA 94105; (650) 931-0500. - 3 - About the Stock Purchase Agreement Purchase and Sale of Shares. On March 12, 2010, we entered into a stock purchase agreement with Fletcher International, Ltd. ( Fletcher or the selling security holder ), an affiliate of Fletcher Asset Management, Inc., which was subsequently amended on July 15, 2010 (such agreement, as amended, the Stock Purchase Agreement ). In connection with the Stock Purchase Agreement, Fletcher agreed to invest up to $10,000,000 in ANTs through the purchase of shares of our common stock at various prices. Specifically, pursuant to the Stock Purchase Agreement, Fletcher purchased (i) 1,500,000 shares of our common stock for an aggregate purchase price of $1,500,000 ($1.00 per share) on March 22, 2010 in an initial closing (the Initial Closing and such shares referred to herein as the Initial Closing Shares ), (ii) 605,76 7 shares of common stock for an aggregate purchase price of $500,000 ($0.8254 per share) on May 11, 2010 in a first tranche closing (the First Tranche , and such shares referred to herein as the First Tranche Shares ), and (iii) 1,600,000 shares of our common stock for an aggregate purchase price of $2,000,000 ($1.25 per share) on July 15, 2010 in a second tranche closing (the Initial Second Tranche , and such shares referred to herein as the Initial Second Tranche Shares ). The Initial Closing Shares, First Tranche Shares and the Initial Second Tranche Shares are included in, and are being registered for resale under the Securities Act of 1933, as amended (the Securities Act ) by, this Registration Statement. In addition, Fletcher has the right, but not the obligation, exercisable at any time prior to July 15, 2016, to purchase (i) an aggregate of up to $1,000,000 of additional shares of our common stock (the Additional Second Tranche , and together with the Initial Second Tranche, the Second Tranche ) at a price per share of $1.25 per share (up to 800,000 shares) and (ii) an aggregate of up to $5,000,000 of additional shares of our common stock (the Third Tranche ) at a price per share of $1.50 per share (up to 3,333,333 shares). The shares of common stock that Fletcher may purchase in the Additional Second Tranche and the Third Tranche are not being registered pursuant to this Registration Statement, however, upon the issuance and sale of shares of common stock in the Additional Second Tranche and/or Third Tranche, the Company will be required to file additional registration statements with respect to such shares and to cause such shares to be registered under the Securities Act for resale by the selling security holder. Initial Warrant and Subsequent Warrant. Pursuant to the Stock Purchase Agreement, the Company also granted to Fletcher a warrant to purchase up to $10,000,000 of shares of our common stock at a price per share of $0.903 (11,074,197 shares of common stock) subject to certain adjustments, which was subsequently amended on July 15, 2010 (such warrant, as amended, the Initial Warrant ). The Initial Warrant is exercisable at any time on or before July 15, 2019, subject to certain extensions, including (i) an extension of two business days for every day this Registration Statement (or any subsequent Registration Statement which is required to be filed by the Company pursuant to the terms of the Stock Purchase Agreement) is not available with respect to all common stock issued or issuable under the Stock Purchase Agreement, the Initial Warrant or the Subsequent Warrant (as defined below) at any time on or after the date that such shares are required to be registered pursuant to the terms of the Stock Purchase Agreement (except during certain permitted blackout periods) or such shares of common stock are not listed or quoted and qualified for trading on a public market (a Public Market Unavailability Day ), and (ii) an extension for that number of days equal to the number of days in the period commencing on July 2, 2010 and ending on the earlier of (y) the date this Registration Statement is declared effective and (z) October 8, 2010. The Initial Warrant is exercisable for cash or on a net share settled or cashless basis. The 11,074,197 shares of our common stock issuable upon exercise of the Initial Warrant are included in, and are being registered for resale under the Securities Act by, this Registration Statement. The Stock Purchase Agreement further provides that if, for two consecutive calendar quarters after March 12, 2014, the Daily Market Price of our common stock for each business day in such calendar quarter exceeds $3.50 per share (the Subsequent Warrant Condition ), the Company is required to give Fletcher notice of the satisfaction of the Subsequent Warrant Condition. The commencement date of measurement of March 12, 2014 is subject to certain extensions, including (i) an extension of one business day for every Public Market Unavailability Day, and (ii) an extension for that number of days equal to the number of days in the period commencing on July 2, 2010 and ending on the earlier of (y) the date this Registration Statement is declared effective and (z) October 8, 2010. On the tenth business day following Fletcher s receipt of notice of the satisfaction of the Subsequent Warrant Condition, the Company will be required to issue and deliver to Fletcher a new warrant (the Subsequent Warrant ) in form substantially the same as the Initial Warrant except that the Subsequent Warrant will provide Fletcher the right to purchase up to $10,000,000 of shares of our common stock with an exercise price per share equal to the product of (i) the exercise price of the Initial Warrant (currently $0.903) as of the date of issuance of the Subsequent Warrant multiplied by (ii) the quotient equal to $3.00 divided by $0.903, subject to certain adjustments. For example, if the exercise price of the Initial Warrant remains $0.903, the exercise price of the Subsequent Warrant would be $3.00. The Subsequent Warrant will have a term of two years from the date of issuance subject to certain extensions, including an extension by the number of days by which the term of the Initial Warrant was extended. The shares of common stock issuable upon exercise of the Subsequent Warrant are not included in this Registration Statement. However, upon issuance of the Subsequent Warrant, the Company will be required to file an additional registration statement with respect to the shares of common stock issuable upon exercise of the Subsequent Warrant. Upon the issuance of the Subsequent Warrant, the Initial Warrant will expire and be of no further force and effect to the extent not previously exercised. As a result of the terms of the Initial Warrant and the Stock Purchase Agreement, we anticipate that Fletcher will exercise the Initial Warrant prior to the delivery of the Subsequent Warrant. In that event, the Company will remain obligated to issue to Fletcher the Subsequent Warrant. The Initial Warrant has and the Subsequent Warrant will have anti-dilution protections that require adjustments to the exercise price of the warrant in the event the Company engages or participates in any sale or issuance of any shares of, or securities convertible into, exercisable or exchangeable, for any shares of any class of the Company s capital stock, subject to certain excluded issuances set forth in the Stock Purchase Agreement (the Future Equity Issuances ). If the Company sells or issues shares or securities with an exercise or conversion price that is less than the warrant exercise price, which is currently $0.903 for the Initial Warrant, and which will initially be $3.00 for the Subsequent Warrant (if the exercise price of the Initial Warrant remains $0.903 at the time of issuance of the Subsequent Warrant), the exercise price for the Initial Warrant and the Subsequent Warrant, respectively, shall automatically be reduced to equal the lesser of (a) the warrant exercise price then in effect and (b) the lowest price per share of the Common Stock paid or payable by any person in the Future Equity Issuance (including, in the case of options, warrants, convertible preferred securities, convertible notes or other securities convertible, exchangeable or exercisable into or for common stock, the lowest price per share at which such conversion, exchange or exercise may occur on any future date). Furthermore, if the Company is required to restate its financial statements, the warrant exercise price shall be reduced to the market value of the Company s common stock during a window of time following the restatement, as defined in the Stock Purchase Agreement and the number of shares subject to be issued under the warrants shall be increased accordingly. Based on the terms of the warrants, a reduction in the warrant exercise price will result in the warrants being exercisable for additional shares of common stock at the lower exercise price determined by dividing the aggregate exercise price (initially $10,000,000 for each warrant) by the adjusted exercise price. - 4 - Quarterly Payments. In addition to the foregoing, for so long as any portion of the Initial Warrant remains outstanding, and commencing on March 31, 2010, we are required to pay to Fletcher on each March 31, June 30, September 30 and December 31, a quarterly payment equal to: the product of (A) the quotient of (x) the remaining unexercised amount of the Initial Warrant as of the third business day preceding such quarterly payment date (initially $10,000,000), divided by (y) the warrant exercise price as of the quarterly payment date (initially $0.903 and subject to adjustments), multiplied by (B) $0.01 per share (each a Quarterly Payment , and such shares to be issued as Quarterly Payments are referred to herein as the Quarterly Payment Shares ). The current Quarterly Payment is $110,741.97. The Company, in its discretion, may pay the Quarterly Payments in cash or in shares of common stock determined by dividing the Quarterly Payment by the Prevailing Market Price (as defined below) on the third business day prior to the applicable Quarterly Payment date. The Company elected to pay the first and second Quarterly Payments in shares of common stock, which were paid to Fletcher on (i) March 31, 2010 pursuant to the issuance of 128,818 shares of common stock and (ii) June 30, 2010 pursuant to the issuance of 100,673 shares of common stock. In the event the Company is unable to pay the Quarterly Payment on each Quarterly Payment date, the Company will be required to pay interest at a rate equal to the greater of (A) 12% per annum or (B) the prime rate interest published by The Wall Street Journal plus 9% per annum on the unpaid Quarterly Payment (payable in cash) until such Quarterly Payment is made. The 229,491 shares of our common stock previously issued in connection with the Quarterly Payments, plus an additional 4,169,68 5 shares of our common stock that may be issued in the future in connection with future Quarterly Payments, are included in, and are being registered for resale under the Securities Act by, this Registration Statement. Prevailing Market Price means the average of the Daily Market Prices (as defined below) of our common stock for the 40 business days ending on and including the third business day before the applicable reference date, but not greater than the average of the Daily Market Prices of the common stock for any five consecutive or nonconsecutive business days (determined in Fletcher's sole discretion) of the 40 business day period. Daily Market Prices means the amount per share of our common stock equal to (i) the daily volume-weighted average price on such date on the OTCBB (or other principal listing service or exchange on which our common stock is then listed) or, if no sale takes place on such date, the average of the closing bid and asked prices thereof on such date on the OTCBB (or other principal listing service or exchange on which our common stock is then listed), in each case as reported by Bloomberg, L.P. (or by such other person or entity as we and Fletcher may agree), or (ii) if our common stock is not then listed or admitted to trading on a market, the higher of (x) the book value per share thereof as determined by any firm of independent public accountants of recognized standing selected by our Board of Directors as of the last calendar day of any month ending within 60 calendar days preceding the date as of which the determination is to be made or (y) the fair value per share thereof determined in good faith by an independent, nationally recognized appraisal firm selected by Fletcher and reasonably acceptable to us, subject to adjustment for stock splits, recombinations, stock dividends and the like. Maximum Number; Limitation on Sales under Stock Purchase Agreement and Warrants. Pursuant to the Stock Purchase Agreement, we cannot issue to Fletcher, and Fletcher cannot purchase, additional shares of common stock to the extent such issuance would result in Fletcher beneficially owning an aggregate number of shares of common stock greater than the Maximum Number (as defined below), unless Fletcher delivers a notice to the Company electing to increase the Maximum Number at least 65 days prior to the date of increase in the Maximum Number. The Maximum Number is the number of shares of the Company s common stock equal to 9.9% of the aggregate number of outstanding shares of common stock calculated on a monthly basis based on the total number of outstanding shares of common stock outstanding on the last day of the applicable month. Pursuant to the Stock Purchase Agreement, we are required to deliver to Fletcher on or before the tenth day of each calendar month a notice (the Outstanding Share Notice ) stating, among other things, the aggregate number of shares of our common stock outstanding as of the last day of the preceding calendar month. If the Outstanding Share Notice reflects a decrease in the number of our outstanding shares of common stock from the number reflected in the Outstanding Share Notice for the prior month, the Maximum Number will be deemed to decrease immediately such that the Maximum Number equals 9.9% of the aggregate number of outstanding shares of common stock reported on the most recent Outstanding Share Notice. If the Outstanding Share Notice reflects an increase in the number of our outstanding shares of common stock from the number reflected in the Outstanding Share Notice for the prior month, then on the 65th day after delivery of the Outstanding Share Notice, the Maximum Number will be increased to a number equal to 9.9% of the aggregate number of outstanding shares of our common stock reported on the new Outstanding Share Notice. We have reported an increase in our outstanding shares of common stock in each Outstanding Share Notice delivered with respect to March 31, 2010, April 30, 2010, May 31, 2010 and June 30, 2010. As a result, the current Maximum Number is 10,860,963 based on the Outstanding Share Report delivered to Fletcher on May 10, 2010. However, the Maximum Number will increase to 11,095,563 shares of common stock effective August 11, 2010, based on the Outstanding Share Notice delivered to Fletcher on June 7, 2010 , to 11,200,213 shares of common stock effective September 12, 2010, based on the Outstanding Share Report delivered to Fletcher on July 9, 2010 and to 11,379,679 shares of common stock effective October 13, 2010, based on the Outstanding Share Report delivered to Fletcher on August 9, 2010 . Fletcher has the right to increase the Maximum Number above the 9.9% limitation by delivering a notice to the Company electing to increase the Maximum Number at least 65 days prior to the date of increase in the Maximum Number. Any shares of common stock that would have been issued to Fletcher pursuant to the Stock Purchase Agreement or upon exercise of either the Initial Warrant or the Subsequent Warrant but for the limitations on the Maximum Number shall be deferred and shall be delivered to Fletcher promptly and in any event no later than three business days after the date such limitations cease to restrict the issuance of such shares (whether due to an increase in the Maximum Number so as to permit such issuance, the disposition by Fletcher of shares of common stock or any other reason) unless Fletcher has withdrawn the applicable Fletcher notice to purchase or warrant exercise notice. - 5 - Effect of Dilutive Issuances. If, at any time within one year following any closing date for the Initial Closing or the closings of the First Tranche, Second Tranche or Third Tranche, or the closing of any exercise of the Initial Warrant or the Subsequent Warrant (each, a Diluted Investment Closing ), there is (i) a public disclosure of our intention or agreement to engage in a Future Equity Issuance, or (ii) a consummation of a Future Equity Issuance, in each case at a price per share below the purchase price or exercise price per share paid (or deemed paid in the case of shares issued in connection with any Quarterly Payments or net share settled exercise of either warrant) by Fletcher for the common stock acquired at such Diluted Investment Closing, then we shall issue and deliver a number of shares of common stock to Fletcher equal to the positive difference, if any, with respect to each Diluted Investment Closing, between (x) the quotient of (1) the aggregate purchase price or aggregate exercise price paid (or deemed to have been paid in the case of a shares issued in connection with a Quarterly Payment or net share settled exercise of the warrants) by Fletcher with respect to such Diluted Investment Closing divided by (2) the Later Issuance Price (as defined below) and (y) the number of shares of common stock actually issued to Fletcher at such Diluted Investment Closing. The term Later Issuance Price means the lowest price per share of common stock paid or payable by any person or entity in the Future Equity Issuance, including, in the case of options, warrants, convertible preferred, convertible notes or other securities convertible, exchangeable or exercisable into or for common stock, the lowest price per share at which such conversion, exchange or exercise may occur on any future date. In connection with the shares potentially issuable to Fletcher pursuant to the exercise of the Initial Warrant and the issuance of shares in connection with the Quarterly Payments, we have reserved 15,243,88 2 shares of our common stock in addition to the 3,935,25 8 shares already issued to Fletcher. The anti-dilution protection for the Initial Warrant and Subsequent Warrant described above are also known as down-round provisions. The Company accounts for warrants with down-round provisions, as derivative liabilities. Similarly, down-round provisions for issuances of common stock are also accounted for as derivative liabilities. These derivative liabilities are measured at fair value with the changes in fair value at the end of each period reflected in current period income or loss. The Company determined the fair value the derivative liabilities to be $17.6 million as of March 15, 2010 in conjunction with the initial Stock Purchase Agreement and subsequently remeasured the fair value of the derivative liabilities to be $ 19.7 million at June 30, 2010. The Company is in the process of revaluing the derivative liabilities in conjunction with the amended Stock Purchase Agreement and included preliminary disclosure in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010. Registration Obligations. The shares of common stock to be sold under the Stock Purchase Agreement and the shares of common stock underlying the Initial Warrant that are offered for resale by this prospectus are subject to registration obligations pursuant to the terms and conditions of the Stock Purchase Agreement. We are obligated to file a registration statement with the SEC registering the sale of the shares of common stock issued or issuable under the Stock Purchase Agreement (including the Initial Closing Shares, the First Tranche Shares, the Initial Second Tranche Shares and the Quarterly Payment Shares) and the shares of common stock underlying the Initial Warrant and to cause the registration statement to be declared effective by the date that is 85 days after the closing of the Initial Second Tranche. We are obligated to file with the SEC a new registration statement with respect to any shares of common stock issued after the date hereof in the Additional Second Tranche and/or Third Tranche and to cause such new registration statements to be declared effective within 70 days of the issuance of the shares of common stock in the Additional Second Tranche and/or Third Tranche. Likewise, we are required to file with the SEC a new registration statement to register the shares of our common stock issuable upon exercise of the Subsequent Warrant and cause such new registration statement to be declared effective no later than 70 days following the issuance of the Subsequent Warrant. If we fail to cause such registration statements to be declared effective by the applicable date, we may incur liability for damages. We are also obligated to use our best efforts to keep the registration statements continuously effective until the earlier of (x) the later of (i) the second anniversary of the issuance of the last share of common stock that may be issued pursuant to the Stock Purchase Agreement or the warrants, and (ii) such time as all of the shares of common stock issued or issuable pursuant to the Stock Purchase Agreement or the warrants can be sold by the selling security holder or any of its affiliates immediately without compliance with the registration requirements of the Securities Act pursuant to Rule 144 under the Securities Act and (y) the date all of the shares of common stock issued or issuable pursuant to the Stock Purchase Agreement, the Initial Warrant or the Subsequent Warrant shall have been sold by the selling security holder and its affiliates. This prospectus forms a part of the registration statement that we filed pursuant to the Stock Purchase Agreement. Amendment to Stock Purchase Agreement. As described above, the Company and Fletcher entered into the original Stock Purchase Agreement on March 12, 2010. We subsequently entered into an amendment to the Stock Purchase Agreement on July 15, 2010. The most significant changes made by the amendment to the Stock Purchase Agreement are summarized as follows: The original Stock Purchase Agreement provided that the Company could require Fletcher to purchase shares of common stock in the future based upon terms as defined in the agreement. This provision has been eliminated by the amendment with the result that we cannot require that Fletcher purchase additional shares. The amendment provides that Fletcher has the right, but not the obligation, to purchase additional shares of our common stock at fixed prices and such right is exercisable until July 15, 2016. The original Stock Purchase Agreement provided that the purchase price was the greater of a fixed price or a Prevailing Market Price as defined in the original Stock Purchase Agreement. The amendment eliminates the Prevailing Market Price and imposes a deadline for the exercise of the purchase rights. The original Stock Purchase Agreement provided that the Initial Warrant would be exercisable for a term of approximately nine years, subject to extension if the shares underlying the Initial Warrant were not registered by July 1, 2010 or upon the occurrence of certain other events. The amendment causes the period that the Initial Warrant will be exercisable to be extended based on the date that the underlying shares are registered or upon the occurrence of certain other events. The amendment changed the Subsequent Warrant Condition. Under the original Stock Purchase Agreement, the Subsequent Warrant Condition would be satisfied if the Average Daily Market Price exceeded $3.00 per share for two consecutive quarters after March 12, 2013. The amendment changes the Subsequent Warrant Condition to be satisfied if the Daily Market Price exceeds $3.50 for two consecutive calendar quarters after March 12, 2014, subject to certain extensions. - 6 - The original Stock Purchase Agreement required that all such shares issued or issuable pursuant to the Stock Purchase Agreement and the related warrants be registered for resale under the Securities Act of 1933, as amended, on or before July 1, 2010 and included substantial monetary penalties if the shares were not registered on or before that date. The amendment removed the specified monetary penalties for failure to register and required that the initial registration statement include only the shares of common stock registered in this registration statement. The Company has agreed, however, to file and cause to become effective registration statements in the future to register all of the shares of common stock for resale on or before certain specified dates. This registration statement is the initial registration statement required by the Stock Purchase Agreement. About This Offering This prospectus relates to the resale of up to 19,179,140 shares of our common stock to be offered by the selling security holder, consisting of (a) 3,935,25 8 shares of our common stock previously issued to the selling security holder pursuant to the terms of the Stock Purchase Agreement, (b) up to 11,074,197 shares of our common stock issuable to the selling security holder upon the exercise of the Initial Warrant, and (c) 4,169,68 5 additional shares of our common stock issuable to the selling security holder after the date hereof in connection with future Quarterly Payments pursuant to the Stock Purchase Agreement. - 7 - SUMMARY OF THE SHARES OFFERED BY THE SELLING SECURITY HOLDER The following table is a summary of the shares being offered by the selling security holder pursuant to this prospectus: Common Stock Offered by Selling Security Holder Up to 19,179,140 shares of Common Stock consisting of (a) 3,935,25 8 shares of our common stock previously issued to the selling security holder pursuant to the terms of the Stock Purchase Agreement, (b) up to 11,074,197 shares of our common stock issuable to the selling security holder upon the exercise of the Initial Warrant, and (c) up to 4,169,68 5 shares of common stock issuable to the selling security holder in connection with the Quarterly Payments. Common Stock Outstanding as of August 25 , 2010 115,142,331 Common Stock Outstanding After the Issuance of Shares in the Quarterly Payments and Initial Warrant (Estimated) 130,386,213 shares assuming the issuance of all common shares included in this Registration Statement (which includes an estimate of the shares to be issued in connection with the Quarterly Payments). This number does not include the shares that may be issued in the Second Tranche or Third Tranche or upon exercise of the Subsequent Warrant. Use of Proceeds We will not receive any proceeds from the sale of the shares of common stock by the selling security holder. However, the Company did receive the proceeds from the sale of the shares to the selling security holder under the Stock Purchase Agreement. The proceeds received by the Company have been and will be used for general corporate purposes. OTCBB Trading Symbol ANTS Risk Factors The shares of common stock offered hereby involve a high degree of risk. See the section entitled RISK FACTORS on page 9 for a discussion of the risks and certain additional factors that should be considered in evaluating an investment in the common stock. - 8 - SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION You should read the summary selected consolidated financial information presented below in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements, including the notes thereto, appearing in the Company s annual report on Form 10-K, as amended on Form 10-K/A, for the fiscal year ended December 31, 2009 and quarterly report on Form 10-Q for the quarterly period ended June 30 , 2010, which are incorporated by reference in this prospectus. The selected consolidated financial information as of and for the years ended December 31, 2009 and 2008, have been derived from the Company s audited consolidated financial statements included in its annual report on Form 10-K, as amended on Form 10-K/A Amendment No. 1, for fiscal year ended December 31, 2009, which is incorporated by reference in this prospectus. The selected consolidated financial information as of and for the six months ended June 30 , 2010 and 2009 have been derived from our unaudited interim consolidated financial statements included in the Company s quarterly reports on Form 10-Q for the quarterly periods ended June 30 , 2010 and 2009, and are incorporated by reference in this prospectus. Management believes that these unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) that are considered necessary for a fair presentation of the Company s consolidated financial condition and results of operations as of the dates and for the periods indicated. Historical results are not necessarily indicative of future results and the results for the six months ended June 30 , 2010 are not necessarily indicative of the Company s expected results for the full year ending December 31, 2010 or any other period. Summary of Operations Six Months Ended June 30 , Year Ended December 31, 2010 2009 2009 2008 Total revenue $ 3,010,398 $ 2,757,944 $ 5,811,682 $ 8,282,729 Operating loss $ (7,389,545) $ (4,302,590) $ (8,346,296) $ (8,455,180) Net loss applicable to common stockholders $ (28,202,221) $ (7,013,047) $ (25,309,688) $ (11,628,584) Net loss per common share (basic and diluted) $ (0.26) $ (0.08) $ (0.27) $ (0.15) Weighted average common shares outstanding 106,846, 218 91,588,388 95,026,487 77,847,729 Summary of Financial Condition June 30 , December 31, 2010 2009 2009 2008 Cash and cash equivalents $ 1,298,984 $ 1,155,183 $ 1,168,024 $ 2,051,807 Total assets $ 30,117,834 $ 30,598,816 $ 30,269,857 $ 33,456,805 Working capital (deficiency) $ (2,618,690) $ (863,068) $ (132,940) $ 2,358,848 Long term debt $ 71,611 $ 3,966,058 $ 1,286,209 $ 2,703,260 Stockholders equity $ 5,119,741 $ 23,022,113 $ 26,069,527 $ 28,043,297 - 9 - RISK FACTORS Special Note Regarding Forward-Looking Statements This Prospectus and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, would likely cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as believes, expects, hopes, may, will, plans, intends, estimates, could, should, would, continue, seeks or anticipates, or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, problems incurred in establishing sales and sales channels, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include, but are not limited to, statements under the captions Company Business Overview, and Risk Factors, as well as other sections in this prospectus. You should be aware that the occurrence of any of the events discussed under the heading Risk Factors and elsewhere in this prospectus could substantially harm our business, results of operations and financial condition. If any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock. The cautionary statements made in this prospectus are intended to be applicable to all related forward-looking statements wherever they may appear in this prospectus. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. In addition to other information in this prospectus, the following risk factors should be carefully considered in evaluating our business since it operates in a highly changing and complex business environment that involves numerous risks, some of which are beyond our control. The following discussion highlights a few of these risk factors, any one of which may have a significant adverse impact on our business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this prospectus, and the risks discussed in our other SEC filings, although the Company s predictions of future performance are based on information known as of the date of this prospectus, actual results could differ materially from those projected in any forward-looking statements. We face significant risks, and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition, results of operations or any combination thereof could be harmed and the trading price of our common stock could decline. Economic Risks The fragile state of the worldwide economy could impact the Company in numerous ways. The effects of the ongoing worldwide economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, has impacted levels of consumer spending, and may impact our business, operating results, financial condition or any combination thereof. The ongoing worldwide economic crisis, supply weakness in the credit markets and significant liquidity problems for the financial services industry may also impact our financial condition in a number of ways. We might face increased problems in collecting our trade receivables, notes, and other obligations receivable. Since we rely on those receivables to finance our ongoing business operations, failure to collect our receivables might cause our business and operations to be severely and materially adversely affected. Also, we may have difficulties in securing additional financing. Business Risks We have a history of losses and a large accumulated deficit and we may not be able to achieve profitability in the future. For the years ended December 31, 2009 and 2008 we incurred net losses applicable to common stockholders of $25,309,688 and $11,628,584, respectively, and net losses applicable to common stockholders of $ 28,202,221 for the six months ended June 30 , 2010. Our accumulated deficit totals $113,239,302 at December 31, 2009 and $141,441,523 at June 30 , 2010. There can be no assurance that we will be profitable in the future. If we are not profitable and cannot obtain sufficient capital, we may have to cease our operations. We may be unable to successfully execute any of our identified business opportunities that we determine to pursue. We currently have a limited corporate infrastructure. In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors: Our ability to raise substantial additional capital to fund the implementation of our business plan; Our ability to execute our business strategy; The ability of our current or potential future products and services to achieve market acceptance; Our ability to manage the expansion of our operations and any acquisitions that we may make, which could result in increased costs, high employee turnover or damage to customer relationships; - 10 - Our ability to attract and retain qualified personnel; Our ability to manage our third party relationships effectively; and Our ability to accurately predict and respond to rapid technological changes in our industry and the evolving demands of the markets we serve. Our failure to adequately address any one or more of the above factors could have a significant adverse effect on our ability to implement our business plan and our ability to pursue other opportunities that arise. We have granted to Fletcher certain anti-dilution protections that may make it more difficult to raise capital in the future. Pursuant to the Stock Purchase Agreement, we have granted to Fletcher certain protections that require that we issue additional shares of common stock to Fletcher and/or reduce the exercise price of the warrants and increase the number of shares issuable under the warrants in the event we issue or sell, or are deemed to have issued and sold, shares of our common stock at prices below the purchase price paid, or exercise price payable, by Fletcher. Such provisions may make it more difficult to raise capital through the sale of shares of our common stock or securities convertible into shares of our common stock. See Prospectus Summary - About the Stock Purchase Agreement. We have granted to Fletcher certain anit-dilution protections accounted for as derivative liabilities at fair value in our financial statements that may cause our results of operations to fluctuate. Pursuant to the Stock Purchase Agreement, we have granted to Fletcher certain protections that require that we issue additional shares of common stock to Fletcher and/or reduce the exercise price of the warrants and increase the number of shares issuable under the warrants in the event we issue or sell, or are deemed to have issued and sold, shares of our common stock at prices per share below the purchase price per share paid, or exercise price payable, by Fletcher. Such anti-dilution protections are also known as down-round protections. We account for warrants and issuances of common stock with down-round protection as derivative liabilities. These derivative liabilities are measured at fair value at the end of each fiscal quarter with the changes in fair value at the end of each quarter reflected in income or loss for the applicable quarter. The recorded change in fair value of derivative liabilities may contribute significant fluctuations in our results of operations. In the event we do not satisfy our obligation to register for resale the shares issued to Fletcher, we may be liable for significant damages. We have agreed to use our best efforts to file registration statements with the SEC to register for resale the shares of common stock issued or to be issued to the selling security holder pursuant to the Stock Purchase Agreement, the Initial Warrant and the Subsequent Warrant. In the event such shares are not registered by one or more effective registration statements by certain dates, we may be liable for significant damages. See Prospectus Summary - About the Stock Purchase Agreement. We rely on key personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not able to grow effectively. Our success depends in large part upon the abilities and continued service of our executive officers, including Joseph Kozak, our Chief Executive Officer, and David Buckel, our Chief Financial Officer, and other key employees. There can be no assurance that we will be able to retain the services of such officers and employees. Our failure to retain the services of our key personnel could have a material adverse effect on us. In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain the necessary personnel could have a material adverse affect on us. We depend on a limited number of customers for a significant portion of our revenue. During 2009, our three largest customers accounted for approximately 97% of our revenue. Revenue from one of these customers was $3.9 million, or 66% of total revenues. Revenues from the second and third customers were $1.4 million, or 25% of total revenues, and $369,000 or 6% of total revenues, respectively. For the six months ended June 30 , 2010, $2,839,412 , or 9 4 % of the Company s gross revenues, were derived from two customers, which represented $ 2,117,518 and $ 721,894 , or 7 0 % and 24% of the Company s total gross revenues, respectively. A decrease in revenue from any of our largest customers for any reason, including a decrease in pricing or activity, or a decision to either utilize another vendor or to no longer use some or all of the products and services we provide, could have a material adverse affect on our revenue. We rely upon reselling partners and independent software vendors for product sales. A significant portion of our sales has been, and we believe will continue to be, made through reselling partners and independent software vendors (together Partners ). As a result, our success may depend on the continued sales efforts of Partners, and identifying and entering into agreements with additional Partners. The use of Partners involves certain risks, including risks that they will not effectively sell or support our products, that they will be unable to satisfy their financial obligations with us, and that they will cease operations. Any reduction, delay or loss of orders from Partners may harm our results. There can be no assurance that we will identify or engage qualified Partners in a timely manner, and the failure to do so could have a material adverse affect on our business, financial condition and results of operations. If we are unable to protect our intellectual property, our competitive position would be adversely affected. We rely on patent protection, as well as trademark and copyright law, trade secret protection and confidentiality agreements with our employees and others to protect our intellectual property. Despite our precautions, unauthorized third parties may copy our products and services or reverse engineer or obtain and use information that we regard as proprietary. We have filed one patent application with the United States Patent and Trademark Office for our ACS product and intend to file more. No patents have been granted for our ACS product. One trademark has been granted. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and third parties may infringe or misappropriate our patents, copyrights, trademarks and similar proprietary rights. If we fail to protect our intellectual property and proprietary rights, our business, financial condition and results of operations would suffer. We believe that we do not infringe upon the proprietary rights of any third party, and no third party has asserted an infringement claim against us. It is possible, however, that such a claim might be asserted successfully against us in the future. We may be forced to suspend our operations to pay significant amounts to defend our rights, and a substantial amount of the attention of our management may be diverted from our ongoing business, all of which would materially adversely affect our business. - 11 - If we experience rapid growth, we will need to manage such growth well. We may experience substantial growth in the size of our staff and the scope of our operations, resulting in increased responsibilities for management. To manage this possible growth effectively, we will need to continue to improve our operational, financial and management information systems, will possibly need to create departments that do not now exist, and hire, train, motivate and manage a growing number of staff. Due to a competitive employment environment for qualified technical, marketing and sales personnel, we expect to experience difficulty in filling our needs for qualified personnel. There can be no assurance that we will be able to effectively achieve or manage any future growth, and our failure to do so could delay product development cycles and market penetration or otherwise have a material adverse effect on our financial condition and results of operations. We could face information and product liability risks and may not have adequate insurance. Our products may be used to manage data from critical business applications. We may become the subject of litigation alleging that our products were ineffective or disruptive in their treatment of data, or in the compilation, processing or manipulation of critical business information. Thus, we may become the target of lawsuits from injured or disgruntled businesses or other users. We carry product and information liability and errors and omissions insurance, but in the event that we are required to defend more than a few such actions, or in the event our products are found liable in connection with such an action, our business and operations may be severely and materially adversely affected. We have indemnified our officers and directors. We have agreed to indemnify our Officers and Directors against possible monetary liability to the maximum extent permitted under Delaware law. Market acceptance of our products and services is not guaranteed and our business model is evolving. We are at an early stage of development and our revenue will depend upon market acceptance and utilization of our products and services, including ACS which is now under development. Our products are under constant development and are still maturing. Customers may be reluctant to purchase products from us because they may be concerned about our financial viability and our ability to provide a full range of support services. Given these risks, customers may only be willing to purchase our products through partners who are not faced with similar challenges. We may have difficulty finding partners to resell our products. Also, due to current economic conditions, including the current recession, some potential customers may have tightened budgets for evaluating new products and technologies and the evaluation cycles may be much longer than in the past. There can be no assurance that our product and technology development or support efforts will result in new products and services, or that they will be successfully introduced. Technology Risks If we deliver products with defects, our credibility will be harmed and the sales and market acceptance of our products will decrease. Our products and services are complex and have at times contained errors, defects and bugs. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. We may agree to indemnify our customers in some circumstances against liability arising from defects in our products. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We carry product and information liability and errors and omissions insurance, but in the event that we are required to defend more than a few such actions, or in the event that we are found liable in connection with such an action, our business and operations may be severely and materially adversely affected. Our ANTs Compatibility Server ( ACS ) product is at an early stage and our business model is not well established. We began developing ACS in 2007 and have not yet begun selling the product. We anticipate that we will sell ACS through partners, including IBM, through the executed OEM agreement. We have not yet established pricing for ACS and have only preliminary estimates as to the possible revenues and expenses associated with sales, support and delivery. It is possible that we will not generate enough revenue to offset the expenses and that the ACS line of business will not be profitable. We will need to continue our product development efforts. We believe that the market for our products will be characterized by increasing technical sophistication. We also believe that our eventual success will depend on our ability to continue to provide increased and specialized technical expertise. There is no assurance that we will not fall technologically behind competitors with greater resources. Although we believe that we enjoy a lead in our product development, and believe that our patent application for ACS and trade secrets provide some protection, we will likely need significant additional capital in order to maintain that lead over competitors who have more resources. We face rapid technological change. The market for our products and services is characterized by rapidly changing technologies, extensive research and the introduction of new products and services. We believe that our future success will depend in part upon our ability to continue to develop and enhance ACS and to develop, manufacture and market new products and services. As a result, we expect to continue to make a significant investment in engineering and research and development. There can be no assurance that we will be able to develop and introduce new products and services or enhance our initial products in a timely manner to satisfy customer needs, achieve market acceptance or address technological changes in our target markets. Failure to develop products and services and introduce them successfully and in a timely manner could adversely affect our competitive position, financial condition and results of operations. - 12 - Financing Risks A failure to obtain financing could prevent us from executing our business plan or operate as a going concern. We anticipate that current cash resources will be sufficient for us to execute our business plan into the fourth quarter of 2010. If further financing is not obtained, including the subsequent investments by Fletcher under the Stock Purchase Agreement, we will not be able to continue to operate as a going concern. We believe that securing additional sources of financing to enable us to continue the development and commercialization of our proprietary technologies will be difficult and there is no assurance of our ability to secure such financing. A failure to obtain additional financing could prevent us from making expenditures that are needed to pay current obligations, allow us to hire additional personnel and continue development of our product and technology. If we raise additional financing by selling equity or convertible debt securities, the relative equity ownership of our existing investors could be diluted or the new investors could obtain terms more favorable than previous investors. If we raise additional funds through debt financing, we could incur significant borrowing costs and be subject to adverse consequences in the event of a default. We have incurred indebtedness. We have incurred debt and may incur substantial additional debt in the future. A significant portion of our future cash flow from operating activities may be dedicated to the payment of interest and the repayment of principal on our indebtedness. There is no guarantee that we will be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with our debt obligations, we will be in default. In addition, we may not be able to refinance our debt on terms acceptable to us, or at all. Our indebtedness could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of another economic downturn. Shareholder Risk There is a limited market for our common stock. Our common stock is not listed on any exchange and trades on the OTCBB. As such, the market for our common stock is limited and is not regulated by the rules and regulations of any exchange. Further, the price of our common stock and its volume in the OTCBB may be subject to wide fluctuations. Our stock price could decline regardless of our actual operating performance, and stockholders could lose all or a substantial part of their investment as a result of industry or market-based fluctuations. Our stock trades relatively thinly. If a more active public market for our stock is not sustained, it may be difficult for stockholders to sell shares of our common stock. Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they are able to sell them. The market price of our common stock will likely fluctuate in response to a number of factors, including but not limited to, the following: sales, sales cycle and market acceptance or rejection of our products; our ability to sign Partners who are successful in selling our products; economic conditions within the database industry; our failure to develop and commercialize ACS; the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof; and domestic and international economic, business and political conditions. Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price. Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting. If we fail to adequately maintain compliance with, or maintain the adequacy of, our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess our internal controls over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price. - 13 - Our actual results could differ materially from those anticipated in our forward-looking statements. This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or future financial performance. When used in this report, you can identify forward-looking statements by terminology such as believes, anticipates, plans, predicts, expects, estimates, intends, will, continue, may, potential, should and similar expressions. These statements are only expressions of expectations. Our actual results could, and likely will, differ materially from those anticipated in such forward-looking statements as a result of many factors, including those set forth above and elsewhere in this report and including factors unanticipated by us and not included herein. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The statements made in this prospectus are based on information which the Company believes to be complete and accurate as of the date of this prospectus. We assume no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. Accordingly, we caution readers not to place undue reliance on these statements. Limitation on ability for control through proxy contest. Our Bylaws provide for a Board of Directors to be elected in three classes. This classified Board may make it more difficult for a potential acquirer to gain control of us by using a proxy contest, since the acquirer would only be able to elect approximately one-third of the directors at each shareholders meeting held for that purpose. Our securities may be de-listed from the OTCBB if we do not meet continued listing requirements. If we do not meet the continued listing requirements of the OTCBB and our securities are de-listed by the OTCBB, trading of our securities would likely be halted. In such case, the market for our common stock would be negatively affected and we could face difficulty raising capital necessary for our continued operations.

parsed_sections/risk_factors/2010/CIK0000815353_emerald_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock is speculative and involves a high degree of risk. You should carefully consider the following important risks and uncertainties before buying shares of our common stock in this offering. If any of the damages threatened by any of the following risk factors actually occur, our business, results of operations, financial condition and cash flows could be materially adversely affected, the trading price of our common stock could decline significantly, and you might lose all or part of your investment. Risks Related to Our Business Unstable market conditions may have serious adverse consequences on our business. The recent worldwide economic downturn and market instability have made the business climate more volatile and more costly. Although all of our business operations are currently conducted in the PRC, our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements for the next twelve months, a radical economic downturn or increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon our expansion plans. These factors may have a material adverse effect on our results of operations, financial condition or cash flows and could cause the price of our common stock to decline significantly. Our products may not achieve or maintain market acceptance. We market our products in the PRC. Dairy product consumption in the PRC has historically been lower than in many other countries in the world. Growing interest in milk products in the PRC is a relatively recent phenomenon which makes the market for our products less predictable. Consumers may lose interest in the products. As a result, achieving and maintaining market acceptance for our products will require substantial marketing efforts and the expenditure of significant funds to encourage dairy consumption in general, and the purchase of our products in particular. There is substantial risk that the market may not accept or be receptive to our products. Market acceptance of our current and proposed products will depend, in large part, upon our ability to inform potential customers that the distinctive characteristics of our products make them superior to competitive products and justify their pricing. Our current and proposed products may not be accepted by consumers or able to compete effectively against other premium or non-premium dairy products. Lack of market acceptance would limit our revenues and profitability. In addition, we market our product, in part, as a healthy and good source of nutrition, however, periodically, medical and other studies are released and announcements by medical and other groups are made which raise concerns over the healthfulness of cow s milk in the human diet. An unfavorable study or medical finding could erode the popularity of milk in the Chinese diet and negatively affect the marketing of our product causing sales, and cause our revenues, to decline. (Address, including zip code, and telephone number, including area code of registrant s principal executive offices) Shu Kaneko Chief Financial Officer 11990 Market Street, Suite 205 Reston, Virginia 20190 Tel: (703) 867-9247 Fax: (678) 868-0633 Contamination of milk powder products produced in the PRC could result in negative publicity and have a material adverse effect on our business. In mid-2008, a number of milk powder products produced within the PRC were found to contain unsafe levels of tripolycyanamide, also known as melamine, sickening thousands of infants. This prompted the Chinese government to conduct a nationwide investigation into how the milk powder was contaminated, and caused a worldwide recall of certain milk powder products produced within the PRC. On September 16, 2008, the PRC s Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) revealed that it had tested samples from 175 dairy manufacturers, and published a list of 22 companies whose products contained melamine. We passed the emergency inspection and were not included on AQSIQ s list. Although we believe that the inevitable contraction in the Chinese milk powder industry caused by this crisis will lead to increased demand for our products, we can not be certain that the illnesses caused by contamination in the milk powder industry, whether or not related to our products, won t lead to a sustained decrease in demand for milk powder products produced within the PRC, thereby having a material adverse effect on our business. As we increase the scale of our operations, we may be unable to maintain the level of quality we currently attain by producing our products in small batches. If quality of our product declines, sales may decline. Our products are manufactured in small batches. If we are able to increase our sales, we will be required to increase our production. Increased production levels may force us to modify our current manufacturing methods in order to meet demand. We may be unable to maintain the quality of our dairy products at increased levels of production. If quality declines, consumers may not wish to purchase our products and a decline in the quality of our products could damage our reputation, business, operations and finances. We depend on supplies of raw milk and other raw materials, a shortage of which could result in reduced production and sales revenues and/or increased production costs. Raw milk is the primary raw material we use to produce our products. As we pursue our growth strategy, we expect raw milk demands to continue to grow. Because we own only a small number of dairy cows, we depend on dairy farms and dairy farmers for our supply of fresh milk. We expect that we will need to continue to increase the number of dairy farmers from which we source raw milk. If we are not able to renew our contracts with suppliers or find new suppliers to provide raw milk we will not be able to meet our production goals and our sales revenues will fall. If we are forced to expand our sources for raw milk, it may be more and more difficult for us to maintain our quality control over the handling of the product in our supply and manufacturing chain. A decrease in the quality of our raw materials would cause a decrease in the quality of our product and could damage our reputation and cause sales to decrease. Raw milk production is, in turn, influenced by a number of factors that are beyond our control including, but not limited to, the following: seasonal factors: dairy cows generally produce more milk in temperate weather than in cold or hot weather and extended unseasonably cold or hot weather could lead to lower than expected production; environmental factors: the volume and quality of milk produced by dairy cows is closely linked to the quality of the nourishment provided by the environment around them, and, therefore, if environmental factors cause the quality of nourishment to decline, milk production could decline and we may have difficulty finding sufficient raw milk; and (Name, address, including zip code, and telephone number, including zip code, of agent for service) governmental agricultural and environmental policy: declines in government grants, subsidies, provision of land, technical assistance and other changes in agricultural and environmental policies may have a negative effect on the viability of individual dairy farms, and the numbers of dairy cows and quantities of milk they are able to produce. We also source large volumes of soy beans, rice, and other raw materials from suppliers. Interruption of or a shortage in the supply of raw milk or any of our other raw materials could result in our being unable to operate our production facilities at full capacity or, if the shortage is severe, at any production level at all, thereby leading to reduced production output and sales and reduced revenues. Even if we are able to source sufficient quantities of raw milk or our other raw materials to meet our needs, downturns in the supply of such raw materials caused by one or more of these factors could lead to increased raw material costs which we may not be able to pass on to the consumers of our products, causing our profit margins to decrease. Volatility of raw milk costs make our operating results difficult to predict, and a steep cost increase could cause our profits to diminish significantly. The policy of the PRC since the mid-1990s has focused on moving the industry in a more market-oriented direction. These reforms have resulted in the potential for greater price volatility relative to past periods, as prices are more responsive to the fundamental supply and demand aspects of the market. These changes in the PRC s dairy policy could increase the risk of price volatility in the dairy industry, making our net income difficult to predict. Also, if prices are allowed to escalate sharply, our costs will rise and we may not be able to pass them on to consumers of our products, which will lead to a decrease in our profits. The milk business is highly competitive and, therefore, we face substantial competition in connection with the marketing and sale of our products. We face competition from non-premium milk producers distributing milk in our marketing area and other milk producers packaging their milk in glass bottles, and other special packaging, which serve portions of our marketing area. Most of our competitors are well established, have greater financial, marketing, personnel and other resources, have been in business for longer periods of time than we have, and have products that have gained wide customer acceptance in the marketplace. Our largest competitors are state-owned dairies owned by the government of the PRC. Large foreign milk companies have also entered the milk industry in the PRC. The greater financial resources of such competitors will permit them to procure retail store shelf space and to implement extensive marketing and promotional programs, both generally and in direct response to our advertising claims. The milk industry is also characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. We may be unable to compete successfully or our competitors may develop products which have superior qualities or gain wider market acceptance than ours. We face the potential risk of product liability associated with food products; Lack of general liability insurance exposes us to liability risks in the event of litigation against us. We sell products for human consumption, which involves risks such as product contamination or spoilage, product tampering and other adulteration of our products. We may be subject to liability if the consumption of any of our products causes injury, illness or death. In addition, we may recall products in the event of contamination or damage. A significant product liability judgment or a widespread product recall may negatively impact our profitability for a period of time depending on product availability, competitive reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. We would also have to incur defense costs, including attorneys fees, even if a claim is unsuccessful. We do not have liability insurance with respect to product liability claims. Any product liabilities claims could have a material adverse effect on its business, operating results and financial condition. The loss of any of our key executives could cause an interruption of our business and an increase in our expenses if we are forced to recruit a replacement; We have no key-man life insurance covering these executives. We are highly dependent on the services of Yang Yong Shan, our Chairman, Chief Executive Officer and President. He has been primarily responsible for the development and marketing of our products and the loss of his services would have a material adverse impact on our operations. We have not applied for key-man life insurance on his life and have no current plans to do so. We do not have any independent directors serving on our board of directors, which could present the potential for conflicts of interest and prevent our common stock from being listed on a national securities exchange. We currently do not have any independent directors serving on our board of directors and we cannot guarantee that our board of directors will have any independent directors in the future. In the absence of a majority of independent directors, our executive officers could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between us and our stockholders, generally, and the controlling officers, stockholders or directors. In addition, since none of the directors currently on our board of would qualify as an independent director under the rules of the New York Stock Exchange, NYSE Amex Equities or The Nasdaq Stock Market, we would fail to satisfy at least one of the necessary initial listing requirements for any of these national securities exchanges. Therefore, until we appoint a majority of independent directors to our board we expect that our common stock will continue to be listed on Over-the-Counter Bulletin Board ( OTCBB ) maintained by the Financial Industry Regulatory Authority ( FINRA ), which might make our common stock less attractive to potential investors. Our management has identified a material weakness in our internal control over financial reporting, which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition and results of operations and the price of our common stock. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Approximate date of proposed sale to the public: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definition of large accelerated filer, accelerated filer, and small reporting company : Large accelerated filer o Accelerated filer o Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company x As further described in Management s Discussion and Analysis of Financial Condition and Results of Operations Material Weakness in Internal Control Over Financial Reporting, our management has identified a material weakness in our internal control over financial reporting. A material weakness, as defined in the standards established by the Public Company Accounting Oversight Board ( PCAOB ), is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Although we are in the process of implementing initiatives aimed at addressing this material weakness, these initiatives may not remediate the identified material weakness. Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial information pursuant to the reporting obligations we will have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the financial information we report, which could adversely affect the price of our common stock. Ensuring that we have adequate internal financial and accounting controls and procedures in place might entail substantial costs, may take a significant period of time, and may distract our officers and employees from the operation of our business, which could adversely affect our operating results and our ability to operate our business. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We became a public company on October 2007, by virtue of the Reverse Merger described in Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Reverse Merger, Private Placements and Related Transactions. As a public company, we need to document, review, test and, if appropriate, improve our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors. Both the Company and its independent auditors will be testing our internal controls in connection with the Section 404 requirements and, as part of that documentation and testing, will identify areas for further attention and improvement. Implementing any appropriate changes to our internal controls might entail substantial costs in order to add personnel and modify our existing accounting systems, take a significant period of time to complete, and distract our officers and employees from the operation of our business. These changes might not, however, be effective in maintaining the adequacy of our internal controls, and could adversely affect our operating results and our ability to operate our business. Risks Related to Doing Business in the PRC Changes in the PRC s political or economic situation could harm us and our operational results. Economic reforms which have been adopted by the Chinese government could change at any time. Because many reforms are unprecedented or experimental, they are expected to be refined and adjusted. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within the PRC, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations This could damage our operations and profitability. Some of the things that could have this effect are: level of government involvement in the economy; THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. control of foreign exchange; methods of allocating resources; balance of payments position; international trade restrictions; or international conflict. The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries. It is possible that the Chinese government may abandon its reforms all together and return to a more nationalized economy. Negative impact upon economic reform policies or nationalization could result in a total investment loss in our common stock. Changes in the interpretations of existing laws and the enactment of new laws may negatively impact our business and results of operation. There are substantial uncertainties regarding the application of Chinese laws, especially with respect to existing and future foreign investments in the PRC. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. Laws and regulations effecting foreign invested enterprises in the PRC have only recently been enacted and are evolving rapidly, and their interpretation and enforcement involve uncertainties. Changes in existing laws or new interpretations of such laws may have a significant impact on our methods and costs of doing business. For example, new legislative proposals for product pricing, approval criteria and manufacturing requirements may be proposed and adopted. Such new legislation or regulatory requirements may have a material adverse effect on our financial condition, results of operations or cash flows. In addition, we will be subject to varying degrees of regulation and licensing by governmental agencies in the PRC. Future regulatory, judicial and legislative changes could have a material adverse effect on our Chinese operating subsidiaries. Regulators or third parties may raise material issues with regard to our Chinese subsidiaries or our compliance or non-compliance with applicable laws or regulations or changes in applicable laws or regulations may have a material adverse effect on our operations. Because of the evolving nature in the law, it will be difficult for us to manage and plan for changes that may arise. It will be difficult for any shareholder of ours to commence a legal action against our executives. Enforcing judgments won against them or the Company will be difficult. Most of our officers and directors reside outside of the United States. As a result, it will be difficult, if not impossible, to acquire jurisdiction over those persons in a lawsuit against any of them, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Because the majority of our assets are located in the PRC, it would also be extremely difficult to access those assets to satisfy an award entered against us in United States court. Moreover, we have been advised that the PRC does not have treaties with the United States providing for the reciprocal recognition and enforcement of judgments of courts. PROSPECTUS Subject to completion, dated January 14, 2010 EMERALD DAIRY INC. 12,589,979 SHARES OF COMMON STOCK This prospectus relates to disposition of up to 12,589,979 shares of our common stock held by the selling stockholders referred to in this prospectus. The shares covered by this prospectus include: 6,969,810 outstanding shares held by the selling stockholders; and 5,620,169 shares issuable upon exercise of warrants held by the selling stockholders. We will not receive any of the proceeds from the sale or other disposition of the shares of common stock covered by this prospectus. However, we will receive gross proceeds of $12,872,575 if all of the warrants held by the selling stockholders are exercised for cash. Our common stock is traded in the over-the-counter market and prices are quoted on the over-the-counter electronic bulletin board under the symbol "EMDY.OB." On January 13, 2010, the last reported sale price for our common stock was $1.70 per share. The selling stockholders may, from time-to-time, sell, transfer or otherwise dispose of any or all of their shares of common stock on any exchange, market or trading facility on which shares are traded or in private transactions and in other ways described in the Plan of Distribution . These dispositions may be at fixed prices, at the prevailing market price at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. Recent PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties. On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce ( MOFCOM ), the State Assets Supervision and Administration Commission ( SASAC ), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission ( CSRC ), and the State Administration of Foreign Exchange ( SAFE ), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the New M&A Rule ), which became effective on September 8, 2006. The New M&A Rule purports, among other things, to require offshore special purpose vehicles ( SPVs ), formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, pursuant to the New M&A Rule and other laws and regulations of the PRC ( PRC Laws ), the CSRC, on its official website, promulgated relevant guidance with respect to the issues of listing and trading of domestic enterprises securities on overseas stock exchanges (the Administrative Permits ), including a list of application materials with respect to the listing on overseas stock exchanges by SPVs. On October 9, 2007, AIDH, parent company of the Chinese corporations through which we do all of our business, became a subsidiary through a Reverse Merger, as further described in Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Reverse Merger, Private Placements and Related Transactions. Based on our understanding of current PRC Laws, we believe that the New M&A Rule does not require us or our Chinese shareholders or our entities in China to obtain the CSRC approval in connection with the Reverse Merger because AIDH completed the approval procedures of the acquisition of a majority equity interest in its PRC subsidiary before September 8, 2006 when the New M&A Rule became effective. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC Laws, including the New M&A Rule. PRC government authorities may take a view contrary to our understanding that we do not need the CSRC approval, and Chinese government authorities may impose additional approvals and requirements. Further, if the PRC government finds that we or our Chinese shareholders did not obtain the CSRC approval, which should have been obtained before consummating the Reverse Merger, we could be subject to severe penalties. The New M&A Rule does not specify penalty terms, so we are not able to predict what penalties we may face, but they could be materially adverse to our business and operations. Future inflation in the PRC may inhibit our ability to conduct business in the PRC. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in the PRC has been as high as 20.7% and as low as 2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in the PRC, which could harm the market for our products and adversely effect our operations and business. INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. We may have difficulty establishing adequate management, legal and financial controls in the PRC. The PRC historically has been deficient in western-style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards. If we are not able to maintain adequate controls our financial statements may not properly represent our financial condition, results of operation or cash flows. Weakness in our controls could also delay disclosure of information to the public which is material to an investment decision with respect to our stock. Fluctuations in the exchange rate between the Chinese currency and the United States dollar could adversely affect our operating results. The functional currency of our operations in China is Renminbi, or RMB. However, results of our operations are translated at average exchange rates into United States dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. We currently do not use hedging techniques, and even if in the future we do, we may not be able to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could cause our profits to decline, which, in turn, may cause our stock prices, to decline. Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business. The Renminbi is currently not a freely convertible currency, and the restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC, or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government s control over routine foreign exchange transactions under current accounts. In the PRC, SAFE regulates the conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for Foreign Exchange Registration Certificates. Currently, conversion within the scope of the current account (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the capital account (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. In addition, on October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies ( Notice 75 ), which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005. According to Notice 75: prior to establishing or assuming control of an offshore company for the purpose of obtaining overseas equity financing with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch; NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change in the capital of the offshore company that does not involve any return investment, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. In addition, SAFE issued updated internal implementing rules ( Implementing Rules ) in relation to Notice 75. The Implementing Rules were promulgated and became effective on May 29, 2007. Such Implementing Rules provide more detailed provisions and requirements regarding the overseas investment foreign exchange registration procedures. However, even after the promulgation of Implementing Rules there still exist uncertainties regarding the SAFE registration for PRC residents interests in overseas companies. It remains uncertain whether PRC residents shall go through the overseas investment foreign exchange registration procedures under Notice 75 or Implementing Rules. Penalties for non-compliance which may be issued by SAFE can impact the PRC resident investors as well as the onshore subsidiary. However, certain matters related to implementation of Circular No. 75 remain unclear or untested. As a result, we may be impacted by potential penalties which may be issued by SAFE. For instance, remedial action for violation of the SAFE requirements may be to restrict the ability of our Chinese subsidiaries to repatriate and distribute its profits to us in the United States. The results of non-compliance are uncertain, and penalties and other remedial measures may have a material adverse impact upon our financial condition and results of operations. Extensive regulation of the food processing and distribution industry in the PRC could increase our expenses resulting in reduced profits. We are subject to extensive regulation by the PRC's Agricultural Ministry, and by other county and local authorities in jurisdictions in which our products are processed or sold, regarding the processing, packaging, storage, distribution and labeling of our products. Applicable laws and regulations governing our products may include nutritional labeling and serving size requirements. Our processing facilities and products are subject to periodic inspection by national, county and local authorities. To the extent that new regulations are adopted, we will be required to conform our activities in order to comply with such regulations. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, operations and finances. The date of this prospectus is ____________, 2009 Limited and uncertain trademark protection in the PRC makes the ownership and use of our trademarks uncertain. We have obtained trademark registrations for the use of our tradenames Xing An Ling and Yi Bai , which have been registered with the PRC s Trademark Bureau of the State Administration for Industry and Commerce with respect to our milk products. We believe our trademarks are important to the establishment of consumer recognition of our products. However, due to uncertainties in Chinese trademark law, the protection afforded by our trademarks may be less than we currently expect and may, in fact, be insufficient. Moreover even if it is sufficient, in the event it is challenged or infringed, we may not have the financial resources to defend it against any challenge or infringement and such defense could in any event be unsuccessful. Moreover, any events or conditions that negatively impact our trademarks could have a material adverse effect on our business, operations and finances. Risks Relating to the Market for Our Common Stock Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms. There may be risks associated with our becoming public through a the Reverse Merger, as described in Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Reverse Merger, Private Placements and Related Transactions. Because of our Reverse Merger, we could be exposed to undisclosed liabilities resulting from our operations prior to the merger and we could incur losses, damages or other costs as a result. In addition, securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. Further, brokerage firms may not want to conduct any secondary offerings on our behalf in the future. These factors may negatively effect the market price and liquidity of our common stock. There is currently a limited trading market for our common stock and a more liquid trading market may never develop or be sustained and stockholders may not be able to liquidate their investment at all, or may only be able to liquidate the investment at a price less than the Company s value. There is currently a limited trading market for our common stock and a more liquid trading market may never develop. As a result, the price if traded may not reflect the value of the Company. Consequently, investors may not be able to liquidate their investment at all, or if they are able to liquidate it may only be at a price that does not reflect the value of our business. Because the price for our stock is low, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in our stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of common stock like ours as collateral for any loans. Even if a more active market should develop, the price may be highly volatile. Our common stock is currently approved for quotation on the OTCBB. We do not satisfy the initial listing standards of the New York Stock Exchange, NYSE Amex Equities or The Nasdaq Stock Market. If we never are able to satisfy any of those listing standards our common stock will never be listed on an exchange. As a result, the trading price of our stock may be lower than if we were listed on an exchange. Our stock may be subject to increased volatility. When a stock is thinly traded, a trade of a large block of shares can lead to a dramatic fluctuation in the share price. These factor may make it more difficult for our shareholders to sell their shares. Our stock price may be volatile in response to market and other factors. The market price for our stock may be volatile and subject to price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control: the increased concentration of the ownership of our shares by a limited number of affiliated stockholders following the Reverse Merger may limit interest in our securities; variations in quarterly operating results from the expectations of securities analysts or investors; revisions in securities analysts estimates or reductions in security analysts coverage; announcements of technological innovations or new products or services by us or our competitors; reductions in the market share of our products; announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; general technological, market or economic trends; volatility in our results of operations; investor perception of our industry or prospects; insider selling or buying; investors entering into short sale contracts; regulatory developments affecting our industry; and additions or departures of key personnel. These factors may negatively effect the market price and liquidity of our common stock. Penny Stock rules may make buying or selling our common stock difficult. Trading in our common stock is subject to the penny stock rules. The Securities and Exchange Commission ( SEC ) has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our common stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity of our common stock. We have a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring certain corporate actions and may lead to a sudden change in our stock price. Our common stock ownership is highly concentrated. As of the date hereof, one shareholder, Yang Yong Shan, beneficially owns 14,063,329 shares, or approximately 42.5% of our total outstanding common stock. He is also our Chairman, Chief Executive Officer and President. His interests may differ significantly from your interests. As a result of the concentrated ownership of our stock, a relatively small number of stockholders, acting together, will be able to control all matters requiring stockholder approval, including the election of directors and approval of mergers and other significant corporate transactions. In addition, because our stock is so thinly traded, the sale by any of our large stockholders of a significant portion of that stockholder s holdings could cause a sharp decline in the market price of our common stock. We have the right to issue up to 10,000,000 shares of "blank check" preferred stock, which may adversely affect the voting power of the holders of other of our securities and may deter hostile takeovers or delay changes in management control. Our certificate of incorporation provides that we may issue up to 10,000,000 shares of preferred stock from time to time in one or more series, and with such rights, preferences and designations as our board of directors may determinate from time to time. While none of our preferred stock has yet been issued, our board of directors, without further approval of our common stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series of our preferred stock. Issuances of shares of preferred stock could, among other things, adversely affect the voting power of the holders of other of our securities and may, under certain circumstances, have the effect of deterring hostile takeovers or delaying changes in management control. Such an issuance would dilute existing stockholders, and the securities issued could have rights, preferences and designations superior to our common stock. A substantial number of shares of our common stock are issuable upon exercise of outstanding warrants, the exercise of which will substantially reduce the percentage ownership of holders of our currently outstanding shares of common stock, and the sale of which may cause a decline in the price at which shares of our common stock can be sold. As of the date of this prospectus, we have outstanding exercisable warrants to purchase an aggregate of 7,460,813 shares of our common stock, of which: 373,334 are exercisable at a price of $0.94 per share; 1,333,333 are exercisable at a price of $1.50 per share; 2,246,748 are exercisable at a price of $1.63 per share; 906,190 are exercisable at a price of $2.04 per share; 75,000 are exercisable at a price of $2.61 per share; and 2,526,208 are exercisable at a price of $3.26 per share. 5,620,169 of the shares underlying these exercisable warrants are being registered hereby for possible resale by those selling stockholders who own the warrants. We also have outstanding warrants to purchase 714,286 shares of our common stock at an exercise price of $1.68 per share, which may become exercisable on March 2, 2010 if certain conditions are met. The issuance of all or substantially all additional shares of common stock that are issuable upon exercise of our outstanding warrants will substantially reduce the percentage equity ownership of holders of shares of our common stock. In addition, the exercise of a significant number of warrants, and subsequent sale of shares of common stock received upon such exercise, could cause a sharp decline in the market price of our common stock. The rights and obligations under the warrants are further described in Description of Securities Warrants. We have not paid, and do not intend to pay, cash dividends in the foreseeable future. We have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Dividend payments in the future may also be limited by other loan agreements or covenants contained in other securities which we may issue. Any future determination to pay cash dividends will be at the discretion of our board of directors and depend on our financial condition, results of operations, capital and legal requirements and such other factors as our board of directors deems relevant. In addition, the promissory notes we issued in the June 2008 Note Offering, as amended, and November 2008 Note Offering, further described in Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Sale of Notes and Warrants, contain restrictive covenants on our payment of dividends, as further described in Description of Securities Promissory Notes. FORWARD-LOOKING STATEMENTS Some of the statements contained in this prospectus are not statements of historical or current fact. As such, they are "forward-looking statements" based on our current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to: future sales and financings; the future development of our business; our ability to execute our business strategy; projected expenditures; and the market for our products. You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are not predictions. Actual events or results may differ materially from those suggested by these

parsed_sections/risk_factors/2010/CIK0000815917_jones_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS You should carefully consider the following risks, as well as the other information contained and incorporated by reference in this prospectus, before you invest in the Interests. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. If any of the following risks occur, our business, financial condition, results of operations and cash flows could be materially adversely affected, the value of the Interests could decline, and you might lose part or all of your investment in the Interests. Risks Related to Our Business MARKET CONDITIONS We are in the securities industry, and a downturn in the U.S. and global securities markets has in the past had, and could in the future have, a significant negative effect on our revenues and could significantly reduce or eliminate our profitability. General political and economic conditions such as an economic recession, natural disasters, terrorist attacks, war, local economic and political conditions, regulatory changes or changes in the law or interest rate or currency rate fluctuations could create a downturn in the U.S and global securities markets. In addition, another terrorist attack in the U.S. could have a disproportionate effect on the domestic securities industry in which we operate. The securities industry, and therefore the Partnership, is highly dependent upon market prices and volumes which are highly unpredictable and volatile in nature. Events since the third quarter of 2008 including the global recession, frozen credit markets, institutional failures and government-sponsored bailouts of a number of large financial services companies have made the capital markets increasingly volatile. We have been affected by the weakened global economic conditions and the ongoing unsettled nature of the financial markets. Our results could decline further in the event the recovery from the recent market downturn continues at a labored pace or in the event of a further economic downturn. Due to the acceleration of economic turmoil in late 2008 and 2009, and its very negative impact on the securities markets, we experienced significant declines in our net revenues which adversely impacted our overall financial results. In response to these events, we implemented significant cost reduction and cost savings measures. There is no assurance that in future periods of economic downturn or reduced revenue such measures will be sufficient to offset revenue declines or that we can implement further cost reductions to sustain profitable operations. As we experienced throughout 2009, a material reduction in volume and lower securities prices result in lower commission revenue, reduced fees due to lower average value of client assets and losses in dealer inventory accounts and syndicate positions, which have reduced and could continue to have a material adverse impact on the profitability of our operations. Furthermore, in an economic recession, we are subject to an increased risk of our clients being unable to meet their commitments such as margin obligations. If our clients are unable to meet their margin obligations, we have an increased risk of losing money on margin transactions and incurring additional expenses defending or pursuing claims. Developments such as lower revenues and declining profit margins could reduce or eliminate our profitability. TRANSACTION VOLUME VOLATILITY Significant increases and decreases in the number of transactions by our clients can have a material negative effect on our profitability and our ability to efficiently process and settle these transactions. Significantly increased client transaction volume may result in operational problems such as a higher incidence of failures to deliver and receive securities and errors in processing transactions, and Table of Contents may also result in increased personnel and related processing costs. In past periods, we have experienced adverse effects on our profitability resulting from significant reductions in securities sales and, likewise, have encountered operational problems arising from unanticipated high transaction volume. We are not able to control such decreases and increases, and there is no assurance that we will not encounter such problems and resulting losses in future periods. In addition, at times of significant increase in client transaction volumes, if we fail to keep current and accurate books and records we would be exposed to disciplinary action by governmental agencies and self-regulatory organizations, which we refer to as SROs. INTEREST RATE CHANGES Our profitability could be impacted by significant interest rate changes. We are exposed to market risk from changes in interest rates. Such changes impact the interest income we earn from clients margin loans, the investment of excess funds, and securities we own. Any changes in interest rates may also have an impact on the expense related to liabilities that finance these assets, such as amounts payable to clients and other interest-bearing liabilities. In addition, such changes can impact the fees earned by us through our minority ownership in the advisor to the Edward Jones Money Market Funds and the market value of the securities owned by us. For further discussion, see Item 7, Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. A decrease in short-term interest rates such as that experienced since late 2007 significantly negatively impacts net interest income. Our interest bearing liabilities are less sensitive to changes in short-term interest rates compared to our interest earning assets, resulting in interest income being more sensitive to rate changes than interest expense. RISK OF INFLATION An increase in inflation could affect securities prices and as a result, our profitability and capital. Inflation and future expectations of inflation can negatively influence securities prices, as well as activity levels in the securities markets. As a result, our profitability and capital may be adversely affected by inflation and inflationary expectations. Additionally, the impact of inflation on our operating expenses may affect our profitability to the extent that additional costs are not recoverable through increased prices of services we offer. INABILITY TO ACHIEVE OUR GROWTH RATE If we are unable to fully achieve our goals for hiring and training our financial advisors or the attrition rate of our financial advisors is higher than our expectations, we may not be able to meet our planned growth rates. It has been and may continue to be more difficult for us to attract qualified applicants for financial advisor positions due to recent market downturns. In addition, we rely heavily on referrals from our current financial advisors in recruiting new financial advisors. During an economic downturn, our financial advisors can be less effective in recruiting potential new financial advisors through referrals. Also, even when there is not a market downturn, we may not achieve our objectives. For instance, we are below our hiring objectives for 2010 and did not achieve our hiring and training objectives in six out of the past eight years. There can be no assurance that we will be able to hire at desired rates in future periods to achieve our planned growth. In addition, a significant number of our financial advisors have been licensed as brokers for less than three years. As a result of their relative inexperience, many of these financial advisors have Table of Contents encountered or may encounter difficulties developing or expanding their businesses. Consequently, we have periodically experienced higher rates of attrition, particularly with respect to the less experienced financial advisors and especially during market downturns. We generally lose more than half of our financial advisors who have been licensed for less than three years. We also have experienced increased financial advisor attrition due to increased competition from other financial services companies and efforts by those firms to recruit our financial advisors. There can be no assurance that the attrition rates we have experienced in the past will not continue or increase in the future. In addition, we have recently raised the performance standards for our financial advisors, which may result in higher attrition for financial advisors unable to meet these performance standards. Either the failure to achieve hiring and training goals or an attrition rate higher than anticipated may result in a decline in the revenue we receive from commissions and other securities related revenues. As a result, we may not be able to achieve the level of net growth upon which our business model is based and our revenues and results of operations may be adversely impacted. For further information about our attrition rates, see Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009 and in our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. CAPITAL LIMITATIONS; UNIFORM NET CAPITAL RULE The SEC s Uniform Net Capital Rule imposes minimum net capital requirements and could limit our ability to engage in certain activities which are crucial to our business. Adequacy of capital is vitally important to broker-dealers, and lack of sufficient capital may limit Edward Jones ability to compete effectively. In particular, lack of sufficient capital or compliance with the Uniform Net Capital Rule may limit Edward Jones ability to commit to certain securities activities such as underwriting and trading, which require significant amounts of capital, its ability to expand margin account balances, as well as its commitment to new activities requiring an investment of capital. Financial Industry Regulatory Authority (FINRA) regulations and the Uniform Net Capital Rule may restrict Edward Jones ability to expand its business operations, including opening new branch offices or hiring additional financial advisors. Consequently, a significant operating loss or an extraordinary charge against net capital could adversely affect Edward Jones ability to expand or even maintain its present levels of business. In addition to the regulatory requirements applicable to the U.S. broker-dealer, Edward Jones Canada and Edward Jones Trust Company are subject to regulatory capital requirements in the U.S. and Canada. Our failure to maintain the required net capital for any of our subsidiaries may subject us to disciplinary actions by the SEC, FINRA, Investment Industry Regulatory Organization of Canada, Office of Thrift Supervision or other regulatory bodies, which could ultimately require our liquidation. In the U.S., Edward Jones may be unable to expand its business, and we may be required to restrict our withdrawal of subordinated debt and partnership capital in order to meet the net capital requirements. For more information see Item 1, Business, Business Operations Uniform Net Capital Rule in our Annual Report on Form 10-K for the year ended December 31, 2009, incorporated by reference in this prospectus. Any restriction on the ability to withdraw partnership capital would impact the ability of partners to withdraw capital from the Partnership. LIQUIDITY Our business in the securities industry requires that sufficient liquidity be available to maintain our business activities, and we may not always have access to sufficient funds. Liquidity, or ready access to funds, is essential to our business. The current tight credit market environment could have a negative impact on our ability to maintain sufficient liquidity to meet our working capital needs. Short term and long term financing are two sources of liquidity that could be affected by the current tight credit market. As a result of the concerns about the stability of the markets Table of Contents in general, some lenders have reduced their lending to borrowers, including us. There is no assurance that financing will be available at attractive terms, or at all, in the future. A significant decrease in our access to funds could negatively affect our business and financial management in addition to our reputation in the industry. In addition, many limited partners, subordinated limited partners and general partners have financed the initial or subsequent purchases of their Partnership interest by obtaining personal bank loans. We have and will arrange many of these loans by asking a bank to offer such loans to our partners. Nevertheless, any such bank loan agreement is and will be between the partner and the bank. We do not guarantee the bank loans, nor can partners pledge their Partnership interest as collateral for the bank loan. Partners who finance all or a portion of their Partnership interest with bank financing may be more likely to request the withdrawal of capital to repay such obligations should the partners experience a period of reduced earnings from the Partnership, including the elimination of partner s earnings from their interests if we should experience an operating loss. As a partnership, any withdrawals by our general partners, subordinated limited partners or limited partners would reduce our available liquidity and capital. Furthermore, many of the same banks which provide financing to limited partners, subordinated limited partners and general partners also provide various forms of financing to the Partnership. To the extent banks maintain or increase credit available to partners, financing available to the Partnership may be reduced. For further information, see Item 7, Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. LACK OF CAPITAL PERMANENCY Because our partnership capital is subject to mandatory liquidation either upon the death or upon the withdrawal request of a partner, the capital is not permanent and a significant mandatory liquidation could lead to a substantial reduction in our capital, which could, in turn, have a material adverse effect on our business. Under the terms of the Partnership Agreement, a partner s capital balance is liquidated upon death. In addition, partners may request withdrawals of their partnership capital, subject to certain limitations on the timing of those withdrawals. Accordingly, our partnership capital is not permanent and is dependent upon current and future partners to both maintain their existing capital investment and make additional capital investments in us. Any withdrawal requests by general partners, subordinated limited partners or limited partners would reduce our available liquidity and capital. Limited partners who request the withdrawal of their capital are repaid their capital in three equal annual installments beginning the month after their withdrawal request. The capital of general partners requesting the withdrawal of capital from the Partnership is converted to subordinated limited partner capital or at the discretion of the Managing Partner redeemed by the Partnership. The withdrawal of subordinated limited partner capital is repaid in six equal annual installments beginning the month after their request for withdrawal. Liquidations upon the death of a partner are generally required to be made within six months of the date of death. Our Managing Partner has the discretion to waive the withdrawal restrictions, which would have the effect of reducing our capital. Due to the nature of the liquidation requirements of the capital, we account for our capital as a liability, in accordance with generally accepted accounting principles. If our capital declines by a substantial amount due to liquidation or withdrawal, we may not have sufficient capital to operate or expand our business or to meet withdrawal requests by limited partners. See Business The Partnership Net Income and Income Before Allocation to Partners in our Annual Report on Form 10-K for the year ended December 31, 2009, incorporated by reference in this prospectus. Table of Contents CANADIAN OPERATIONS We are focusing heavily on efforts and intend to continue to make substantial investments to support the potential profitability of our Canadian operations, which have not achieved profitability since its inception in 1994. We commenced operations in Canada in 1994 and plan to continue to expand our branch system in Canada. Our Canadian operation has operated at a substantial deficit from its inception. We plan to make additional investments in our Canadian operations, which may be substantial. There is no assurance our Canadian operations will ultimately become profitable. For further information on the results of operations of our Canadian operations, see Note 18 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 10 and Note 11 to the Unaudited Consolidated Financial Statements contained in our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, respectively, incorporated by reference in this prospectus. ACTIONS BY REGULATORY AGENCIES The securities industry is highly regulated, and we are subject to various regulatory inquiries and investigations, which could lead to formal proceedings and, if adversely determined, could materially affect our business. From time to time we have received and may in the future receive information requests or subpoenas from various regulatory and enforcement authorities. These inquiries or requests for information have in the past, and may in the future result in additional inquiries by the regulators or more specific investigations of us. Edward Jones is from time to time subject to examinations and investigations of which it may not be presently aware and such matters could lead to formal actions and ancillary civil suits, which may impact Edward Jones business. In view of the inherent difficulty of predicting the outcome of the matters, particularly in cases in which agencies may seek substantial or indeterminate fines or penalties, or actions which are in very preliminary stages, we cannot predict with certainty the eventual loss or range of loss, if any, related to such matters. The outcome of these actions could be material to our future operating results for a particular period or periods. For more information, see Business Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2009 and Legal Proceedings in our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. LEGISLATIVE AND REGULATORY INITIATIVES Newly adopted federal legislation and pending regulatory proposals intended to reform the financial services industry could significantly impact the regulation and operation of us and our subsidiaries and our revenue and profitability. In addition, such laws and regulations may significantly alter or restrict our historic business practices, which could negatively affect our operating results. We are subject to extensive regulation by federal and state regulatory agencies and by self-regulating organizations, which we refer to as SROs, within the industry. We operate in a regulatory environment that is subject to ongoing change and has seen significantly increased regulation in recent years. We may be adversely affected as a result of new or revised legislation or regulations, changes in federal, state or foreign tax laws and regulations, or by changes in the interpretation or enforcement of existing laws and regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), passed by the U.S. Congress and signed by the President July 21, 2010, includes provisions that could potentially impact our operations. Table of Contents The Dodd-Frank Act. Among the numerous provisions in the Dodd-Frank Act are those pursuant to which the SEC has been directed to study existing practices in the industry, and has been granted discretionary rulemaking authority to establish, among other things, comparable standards of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers, and such other customers as the SEC provides by rule. The standard of conduct would require the broker-dealer/investment adviser to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or investment adviser providing the advice. In addition, the Dodd-Frank Act contains new or enhanced regulations that could impact specific securities products offered by us to investors and specific securities transactions. It is unclear at this time whether the SEC will engage in rulemaking or issue interpretive guidance concerning the standard of conduct for broker-dealers and investment advisors. Similarly, it is unclear whether FINRA or other regulatory authorities will issue rules related to the Dodd-Frank Act and what impact such rulemaking activities will have on us or our operations. Since the passage of the Dodd-Frank Act we have not been required to enact material changes to our operations. However, we continue to review and evaluate the provisions of the Dodd-Frank Act and the impending rules to determine what impact or potential impact it may have on the financial services industry, us and our operations. International Financial Reporting Standards. The International Accounting Standards Board, which we refer to as IASB developed a core set of accounting standards to act as a framework for financial reporting known as the International Financial Reporting Standards, which we refer to as IFRS. By 2007, the majority of listed European Union companies, including banks and insurance companies, began using IFRS to prepare financial statements. In contrast, the majority of public companies in the U.S. prepare financial statements under the general accepted accounting principles in the U.S., which we refer to as GAAP. The SEC has proposed a mandatory adoption of IFRS starting in 2015 with early adoption permitted before that date. It is unclear at this time how the SEC will propose GAAP and IFRS be harmonized if the proposed change is adopted. In addition, the Canadian Accounting Standards Board has announced a mandatory adoption of IFRS in Canada starting in 2011. We are currently unable to determine what impact, if any, IFRS would have on our financial position or results of operations. When adopted IFRS could significantly impact the way we determine income before allocations to partners, allocations to partners, or returns on our capital. In addition, switching to IFRS will be a complex endeavor for us. We will need to develop new systems and controls around the principles of IFRS. Since this is a new endeavor, the specific costs associated with this conversion are uncertain. Rule 12b-1 Fees. We receive various payments in connection with the purchase, sale and holding of mutual fund shares by our clients. Those payments include Rule 12b-1 fees and expense reimbursements. Rule 12b-1 allows a mutual fund to pay distribution and marketing expenses out of the fund s assets. The SEC currently does not limit the size of Rule 12b-1 fees that funds may pay, FINRA does impose such limitations. However, in July 2010, the SEC proposed reform of Rule 12b-1 under the Investment Company Act of 1940 (the ICA ). This proposed reform was the result of Congressional subcommittee hearings and SEC efforts that began in July 2007 centered on Rule 12b-1 fees. For further discussion regarding this proposed reform, see Management s Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Report on Form 10-Q for the quarter ended June 25, 2010. For further information on the amount of Rule 12b-1 fees (i.e., service fees) earned by us, see Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009 and in our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. Table of Contents Any of the foregoing regulatory initiatives, if adopted, could adversely affect our business operations and business model. As of the date of this prospectus, except as described above with respect to the Dodd-Frank Act, none of these initiatives discussed above have been adopted. We cannot predict with any certainty whether or which of these regulatory proposals will be adopted in their current form, adopted subject to further revisions or not adopted at all. If adopted, some of these initiatives could significantly and adversely impact our operating costs, our structure, our ability to generate revenue and our overall profitability. BRANCH OFFICE SYSTEM Our system of maintaining branch offices primarily staffed by one financial advisor may expose us to risk of loss or liability from the activities of our financial advisors. Most of our branch offices are staffed by a single financial advisor and a branch office administrator without an onsite supervisor as would be found at broker-dealers with multi-broker branches. Our primary supervisory activity is conducted from our headquarters offices. Although this method of supervision is designed to comply with all applicable industry and regulatory requirements, it is possible that we are exposed to a risk of loss arising from alleged imprudent or illegal actions of our financial advisors. Furthermore, we may be exposed to further losses if additional time elapses before our supervisory personnel detect problem activity. In addition, we maintain personal financial and account information and other documents and instruments for our clients at our branch offices, both physically and in electronic format. Because the branch offices are relatively small and some are in remote locations, the security systems at these branch offices may not prevent theft of such information. If security of a branch is breached and personal financial and account information is stolen, our clients may suffer financial harm and we could suffer financial harm, reputational damage and regulatory issues. LITIGATION AND REGULATORY INVESTIGATIONS AND PROCEEDINGS As a securities firm, we are subject to litigation involving civil plaintiffs seeking substantial damages and regulatory investigations and proceedings, which have increased over time and are expected to continue to increase even as global market conditions improve. Many aspects of our business involve substantial litigation and regulatory risks. We are, from time to time, subject to examinations and informal inquiries by regulatory and other governmental agencies. Such matters have in the past, and could in the future, lead to formal actions, which may impact our business. In the ordinary course of business, we are also subject to arbitration claims, lawsuits and other significant litigation such as class action suits. Over time, there has been increasing litigation involving the securities industry in general and us in particular, including class action suits that generally seek substantial damages. We incurred significant expenses to defend and/or settle claims over the last few years, and we anticipate the number of claims against us will increase in light of the recent economic recession. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages or in actions which are at very preliminary stages, we cannot predict with certainty the eventual loss or range of loss related to such matters. Due to the uncertainty related to litigation and regulatory investigations and proceedings, we cannot determine if future litigation will have a material adverse effect on our consolidated financial condition. Such legal actions may be material to future operating results for a particular period or periods. For more information regarding unresolved claims, see Business Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2009 and Legal Proceedings in our Quarterly Reports on Form 10-Q for the quarters ended March 26, 2010 and June 25, 2010, incorporated by reference in this prospectus. Table of Contents UPGRADE OF TECHNOLOGICAL SYSTEMS We may engage in significant technology initiatives in the future which may be costly and could lead to disruptions. From time to time, we have engaged in significant technology initiatives and expect to continue to do so in the future. Such initiatives are not only necessary to better meet the needs of our clients, but also to satisfy new industry standards and practices and better secure the transmission of our clients information on our systems. With any major system replacement, there will be a period of education and adjustment for the branch and home office associates utilizing the system. Following any upgrade or replacement, if our systems or equipment do not operate properly, are disabled or fail to perform due to increased demand (which might occur during market upswings or downturns), or if a new system or system upgrade contains a major problem, we could experience unanticipated disruptions in service, including interrupted trading, slower response times, decreased client service and client satisfaction and delays in the introduction of new products and services, any of which could result in financial losses, liability to clients, regulatory intervention or reputational damage. Further, the inability of our systems to accommodate a significant increase in volume of transactions could also constrain our ability to expand our business. INTERRUPTION OF BUSINESS AND OPERATIONS Any substantial disruption to our business and operations could lead to significant personnel and financial loss to our business and operations as well as harm relations with our clients. Our headquarter facilities and our existing computer system and network, including its backup systems, are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage, computer viruses, intentional acts of vandalism and similar events. Such an event could substantially disrupt our business by causing physical harm to our headquarter facilities and its technological systems. In addition, our reputation and business may suffer if clients experience data and financial loss from a significant interruption. We established a second data center in Tempe, Arizona, which operates as a secondary data center to our own primary data center located in St. Louis, Missouri and is designed to enable us to maintain service during a system disruption contained in St. Louis that is limited to a short-term interruption. The staff at our Tempe facility would likely not be sufficient to operate the systems in the event of a prolonged disruption to the St. Louis data center and office facilities as well as the geographic region, which would prevent staff from working either from the St. Louis headquarters or from home. In such event, we would need to re-locate staff to the Tempe facility, which might result in a delay in service during the transition and substantial additional costs and expenses. While we have disaster recovery and business continuity planning processes, and interruption and property insurance to mitigate and help protect us against such losses, there can be no assurance that we are fully protected from such an event. OPERATIONAL SYSTEMS Our Canadian operations became self-clearing, which entails us taking on increased risk and responsibilities previously performed by a third party clearing firm. During the second quarter of 2009, Edward Jones Canada became self-clearing. As a result Edward Jones Canada has become the custodian for client securities and manages all related securities and cash processing. Clearing and execution services include the confirmation, receipt, settlement and delivery functions involved in securities transactions. Self-clearing securities firms are subject to substantially more regulatory examination than firms that rely on others to perform clearing functions. Errors in performing clearing functions, including clerical and other errors related to the handling of funds and securities held by Edward Jones Canada on behalf of its clients, could lead to losses and liability in related lawsuits brought by clients and others, and proceedings and investigations by regulators. We have been exposed to similar risks in the U.S. for many years, as noted in Business Business Operations in our Annual Report on Form 10-K for the year ended December 31, 2009, incorporated by reference in this prospectus. Table of Contents RELIANCE ON ORGANIZATIONS Our dependence on third-party organizations exposes us to disruption if their products and services are no longer offered, supported or develop defects. We incur obligations to our clients which are supported by obligations from firms within the industry, especially those firms with which we maintain relationships by which securities transactions are executed. The inability of an organization, or to a lesser extent, any securities firm with which we do a large volume of business, to promptly meet its obligations could result in substantial losses to us. We are particularly dependent on Broadridge Financial Solutions, Inc., which we refer to as Broadridge, which acts as our primary vendor for providing accounting and record-keeping for client accounts in both the U.S. and Canada. Our communications and information systems are integrated with the information systems of Broadridge. There are relatively few alternative providers to Broadridge and although we have analyzed the feasibility of performing Broadridge s functions internally, we may not be able to do it in a cost-effective manner or otherwise. Consequently, any new computer systems or software packages implemented by Broadridge which are not compatible with our systems, or any other interruption or the cessation of service by Broadridge as a result of systems limitations or failures, could cause unanticipated disruptions in the our business which may result in financial losses and/or disciplinary action by governmental agencies and/or SROs. It is unclear what, if any, impact the current economic downturn, particularly in the financial services industry, will have on Broadridge, and their ability to meet their service level commitments to us. We are substantially dependent upon the operational capacity and ability of the National Securities Clearing Corp., the Depository Trust Company, the Fixed Income Clearing Corp., and the Canadian Depository of Securities. Any serious delays in the processing of securities transactions encountered by these clearing and depository companies may result in delays of delivery of cash or securities to our clients. If for any reason, any of our clearing, settling or executing agents were to fail, we and our clients would be subject to possible loss. We also use a major bank for custody and settlement of treasury securities and the Governmental National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation issues. If this bank experiences any disruption in service, we may suffer financial, regulatory or reputational harm. Edward Jones does not employ its own floor brokers for transactions on exchanges in either the U.S. or Canada. Edward Jones has arrangements with other brokers to execute its transactions in return for a commission based on the size and type of trade. If, for any reason, any of these clearing, settling, or executing agents were to fail, Edward Jones and our clients would be subject to possible loss. To the extent that Edward Jones would not be able to meet the obligations of our clients, such clients might experience delays in obtaining the protections afforded them. In addition, we derived approximately 25% of our total revenue for 2009 from American Funds Distributors, Inc. and its family of mutual funds. Significant reductions in the revenues from this mutual fund source could have a material impact on our results of operations. CREDIT RISK We are subject to credit risk due to the nature of the transactions we process for our clients. We are exposed to the risk that third parties that owe us money, securities or other assets will not meet their obligations. Many of the transactions in which we engage expose us to credit risk in the event of default by our counterparty or client. In addition, our credit risk may be increased when the collateral we hold cannot be realized or is liquidated at prices insufficient to recover the full amount of Table of Contents the obligation due to us. For more information about our credit risk, see Management s Discussion and Analysis of Financial Condition and Results of Operations Risk Management Credit Risk in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, incorporated by reference in this prospectus. UNDERWRITING, SYNDICATE AND TRADING POSITION RISKS We engage in underwriting activities, which can expose us to material losses and liability. Participation as a manager or syndicate member in the underwriting of fixed income and equity securities subjects us to substantial risk. As an underwriter, we are subject to risk of substantial liability, expense and adverse publicity resulting from possible claims against us as an underwriter under federal and state securities laws. Such laws and regulations impose substantial potential liabilities on underwriters for material misstatements or omissions in the prospectus used to describe the offered securities. In addition, there exists a potential for possible conflict of interest between an underwriter s desire to sell its securities and its obligation to its clients not to recommend unsuitable securities. In recent years, there has been an increasing incidence of litigation in these areas. These lawsuits are frequently brought by large classes of purchasers of underwritten securities. Such lawsuits often name underwriters as defendants and typically seek substantial amounts in damages. Further, as an underwriter, we may incur losses, if we are unable to resell the securities we are committed to purchase or if we are forced to liquidate all or part of our commitment at less than the agreed upon purchase price. Furthermore, the commitment of capital to an underwriting may adversely affect our capital position and, as such, our participation in an underwriting may be limited by the requirement that we must at all times be in compliance with the SEC s Uniform Net Capital Rule. In maintaining inventory in fixed income and equity securities, we are exposed to a substantial risk of loss, depending upon the nature and extent of fluctuations in market prices. COMPETITION We are subject to intense competition for clients and personnel, and many of our competitors have greater resources. All aspects of our business are highly competitive. We compete for clients and personnel directly with other securities firms and increasingly with other types of organizations and other businesses offering financial services, such as banks and insurance companies. Many of these organizations have substantially greater capital and additional resources, and some entities offer a wider range of financial services. Over the past several years, there has been significant consolidation of firms in the financial services industry, forcing us to compete with larger firms with greater capital and resources, brokerage volume and underwriting activities, and more competitive pricing. Also, we continue to compete with a number of firms offering discount brokerage services, usually with lower levels of personalized service to individual clients. With minor exceptions, clients are free to transfer their business to competing organizations at any time, although there may be a fee to do so. Competition among financial services firms also exists for financial advisors and other personnel. Our continued ability to expand our business and to compete effectively depends on our ability to attract qualified employees and to retain and motivate current employees. If our profitability decreases, then bonuses paid to financial advisors and other personnel, along with profit-sharing contributions, may be decreased or eliminated, increasing the risk that personnel could be hired away by competitors. In addition, we have recently faced increased competition from larger firms in our non-urban markets, and from a broad range of firms in the urban and suburban markets in which we compete. Table of Contents The competitive pressure we experience could have an adverse effect on our business, results of operations, financial condition and cash flow. For additional information, see Item 1, Business Competition of our Annual Report on Form 10-K for the year ended December 31, 2009, incorporated by reference in this prospectus. Risks Related to an Investment in the Limited Partnership Interests HOLDING COMPANY We are a holding company with no direct operations; as a consequence, our ability to satisfy our obligations under the Partnership Agreement will depend in large part on the ability of our subsidiaries to pay distributions or dividends to us, which is restricted by law and contractual obligations. Since we are a holding company and certain of our subsidiaries are regulated companies, including Edward Jones, our principal operating subsidiary, which is a registered broker-dealer, the principal sources of cash available to us are distributions or dividends from our subsidiaries and other payments under intercompany arrangements with our subsidiaries. The Interests will be solely our obligation, and our subsidiaries will have no obligation (through a guarantee or otherwise) to pay any amount in respect of the Interests or to make any funds available for any such payment. Accordingly, our ability to generate the funds necessary to satisfy our obligations with respect to the Interests, including the 7 1/2 % guaranteed payment (for tax purposes, within the meaning of the Code) will be dependent on distributions, dividends and intercompany payments from our subsidiaries, and if these sources are not adequate, we may be unable to satisfy such obligations. Edward Jones is subject to various statutory and regulatory restrictions applicable to broker-dealers generally that limit the amount of cash distributions, dividends, loans and advances that those subsidiaries may pay to us. Regulations relating to capital requirements affecting some of our subsidiaries also restrict their ability to pay distributions or dividends and make loans to us. See Business Regulation and Business Uniform Net Capital Rule in our Annual Report on Form 10-K for the year ended December 31, 2009, incorporated by reference in this prospectus. In addition, our subsidiaries may be restricted under the terms of their financing arrangements from paying distributions or dividends to us, or may be required to maintain specified levels of capital. Moreover, we or our subsidiaries may enter into financing arrangements in the future which may include additional restrictions or debt covenant requirements further restricting distributions to the Partnership, which may impact our ability to make distributions to our limited partners. For example, the terms of the note purchase agreements relating to Edward Jones s 7.79% capital notes due 2011 and 7.33% subordinated capital notes due 2014 require that Edward Jones maintain partnership capital in an amount at least equal to $400 million. If in the future Edward Jones or our other subsidiaries were unable to pay distributions to us in an amount sufficient to meet our obligations due to a lack of statutory net capital, changes to the applicable laws or regulations or for some other reason, we would be unable to meet our obligation to make the 7 1/2% Payment under the Partnership Agreement. NON-VOTING INTERESTS; ABSENCE OF MARKET; PRICE FOR INTERESTS The Interests are non-voting and non-transferable, and the price only represents book value. None of the limited partners in their capacity as limited partners may vote or otherwise participate in the management of our business. Without the consent of our limited partners or general partners, our Managing Partner has the authority to amend the Partnership Agreement, pursuant to which the Interests offered are issued. There is no fair market value for the Interests, since there is no market for the Interests. None of our limited partners may sell, pledge, exchange, transfer or assign any such Interest without the express written consent of our Managing Partner (which is not expected to be Table of Contents given) as further discussed under heading Partnership Governance. The price (currently $1,000 per Interest) at which the Interests are offered represents the book value of each Interest. The book value of the Interests could be less than the price paid, if the capital of the general partners and subordinated limited partners was reduced to zero as a result of losses incurred by us. AVAILABILITY OF FINANCING Limited partners can finance a portion of the purchase of their Interests with a bank loan, but we do not guarantee the bank loan. A limited partner may be unable to obtain or maintain a personal bank loan to pay for the Interests due to bank lending practices. Many limited partners finance a portion of the initial or subsequent purchases of their Interests by obtaining personal bank loans. Any such bank loan agreement is and will be between the limited partner and the bank. We do not guarantee the bank loans, nor can the limited partners pledge their Interests as collateral for the bank loans. Historically, we have asked certain banks if they would make financing available to limited partners and have provided the initial documentation to the limited partners for such banks. We also have provided on-going administration for the loans between the limited partners and the banks according to the loan agreement and instructions provided to us by the limited partners. Terms of bank financing have generally been based on three year term loans with interest payable quarterly. Under the terms of the loan agreement with the banks, we apply any earnings, including the 7 1/2% Payment payable to limited partners under the Partnership Agreement, to the limited partner s bank loan until the loan is paid off, after which time the earnings are distributed directly to the limited partner. There is no assurance the distributions from the Partnership, including the 7 1/2% Payment, will be sufficient to pay the interest on a limited partner s bank loan or repay the principal amount of the bank note at or prior to its maturity. Since all distributions including the 7 1/2% Payment from new and existing Interests owned are paid directly to the bank to pay interest and or principal on a limited partner s loan, limited partners will be required to pay from other resources any income taxes due each year as a result of owning their Interests. Historically, for non-financial advisor limited partners, the bank loan agreements have permitted a portion of the Interest s distributions to be paid to limited partners for the payment of taxes. However, there can be no assurance that such distributions will be sufficient to pay all income taxes due each year arising from limited partner Interests. Furthermore, in the event we experience a loss which leads to our liquidation, there is no assurance there will be sufficient capital available to distribute to limited partners for the repayment of the bank loans. Limited partners who have chosen to finance a portion of the purchase price of their Interests assume all risks associated with the bank loan including the legal obligation to repay the loan. There is no assurance that banks will provide financing for the initial purchase of the Interest or agree to provide additional financing in the future if the bank loan is still outstanding when the bank note becomes due. Limited partners may need to find other means to finance a portion of their initial purchase or subsequent repayment of the bank loan at maturity. If limited partners are unable to obtain such financing, they may be required at that time to sell their Interests to pay off their outstanding debt. Under the loan agreements with the banks, all proceeds from any liquidation of a limited partner s Interests are first applied to repay the bank loan before any amounts are repaid to the limited partner. If a significant portion of the limited partners sell their Interests, our liquidity could be impacted. For further discussion, see subheading Liquidity of this section on page 12. STATUS AS A PARTNER FOR TAX PURPOSES Limited partners will be exposed to income tax liability on our income, whether or not income is distributed, and may have an increased chance of being audited. Limited partners generally will be allocated their allocable share of all of our tax attributes. Net losses for tax purposes have historically been excluded from this allocation as provided in Section 8.6A Table of Contents of our Partnership Agreement. However, if the capital of the general partners and subordinated limited partners was reduced to zero, then limited partners would be allocated net losses for tax purposes. Limited partners will be required to file tax returns and pay income tax in those states and foreign jurisdictions in which we operate, as well as in the limited partner s state of residence or domicile. Limited partners will be liable for income taxes on their pro rata share of our taxable net income irrespective of whether cash in an amount equal to such income tax liability is distributed. The amount of income the limited partner pays tax on can significantly exceed the net income earned on the Interests and the income distributed to such limited partner, which results in a disproportionate share of income being used to pay taxes. Our income tax returns may be audited by government authorities, and such audit may result in the audit of the returns of the limited partners (and, consequently, an amendment of their tax returns). In addition, from time to time, legislative changes to the Code or state laws may be adopted that could increase the tax rate applicable to the limited partners net income earned and/or subject the net income earned to additional taxes currently not applicable. For further discussion, see the heading Material United States Tax Consequences and Material Canadian Federal Income Tax Consequences. POSSIBLE TAX LAW CHANGES Recent federal legislation proposals, if adopted, could significantly impact a limited partner s taxes by imposing self-employment taxes on such Interest. Congress recently considered legislation that would require payment of self-employment tax by limited partners on limited partner earnings from partnerships engaged in professional service businesses (such as Edward Jones). Under such legislation, tax consequences applicable to holders of our Interests may be substantially impacted. It is unknown whether the self-employment tax provisions in the form recently considered, some modified form or any form will ever become law. Under the recently considered legislation, the self-employment tax provisions may increase taxes paid on income from the Partnership Interests by 2.9% for the Medicare portion and by 12.4% for the social security portion, resulting in a total increase in taxes of up to 15.3% for some limited partners. This would significantly reduce a limited partner s after-tax return on income from Partnership Interests. Future changes in tax laws cannot be predicted and may substantially impact a limited partner s interest(s). For further discussion, see the heading Material United States Tax Consequences on page 40. RISK OF DILUTION The Interests may be diluted from time to time, which could lead to decreased returns to the limited partners. Our Managing Partner has the ability, in his sole discretion, to issue additional Interests or general partners capital. With respect to additional Interests, to the extent additional expense is incurred by us in servicing the additional annual payment requirements (the 7 1/2% Payment pursuant to Section 3.3 of the Partnership Agreement) for any such additional Interests, holders of existing Interests may suffer decreased returns on their investment because the amount of our net income in which they participate may be reduced as a consequence. Additionally, we have historically retained approximately 28% or more of our general partners net income (as defined in the Partnership Agreement) as capital which is credited monthly to the general partners Adjusted Capital Contributions (as defined in the Partnership Agreement). Such contributions, along with any additional capital contributions by general partners, will reduce the percentage of participation in net income by limited partners. There is no requirement to retain a minimum amount of general partners net income, and the percentage of retained net income could change at any time in the future. In accordance with the partnership agreement, the percentage of income allocated to limited partners is reset annually and the amount of retained general partner income reduces the income allocated to limited partners. The allocation of net income to limited partners is further discussed under the heading Cash Distributions and Allocations on page 33. Table of Contents ALLOCATION OF NET INCOME At any time, by amending our Partnership Agreement, the net income allocated to our limited partners may be reduced. At any time, our Managing Partner or an affirmative vote of our general partners holding a majority of the general partner interests may amend our Partnership Agreement, including the allocation of net income to our general partners. If our Partnership Agreement were amended and changes made to the manner by which the Partnership allocates net income so that the amount of net income permitted to be distributed to the general partners increased, then the amount of our net income distributable to our limited partners would be reduced. Such an amendment may occur without the consent or approval of (and without prior notice to) any limited partner or subordinated limited partner. LIMITATION OF LIABILITY; INDEMNIFICATION The Partnership Agreement limits the liability of, and requires that we indemnify, our Managing Partner and general partners under certain circumstances, which may limit a limited partner s rights against them and could reduce the accumulated profits distributable to limited partners. Our Partnership Agreement provides that neither our Managing Partner nor any of the general partners, which we refer to as a Covered Person will be liable to any of the partners for any acts or omissions by such partner on behalf of the Partnership (even if such action, omission or failure constituted negligence); provided that the provision in the Partnership Agreement does not limit the liability of a such Covered Person (a) for fraud, (b) acts or omissions not in subjective good faith or which involve intentional misconduct or a knowing violation of law or which were grossly negligent, or (c) for any transaction in which such person derived improper personal benefit. We also are required to indemnify our Managing Partner and general partners against any loss or damage incurred by any such partner by reason of any action performed or omission made by any of them on behalf of the Partnership, other than actions for which such partner would be liable as described above. As a result of these provisions, the limited partners will have more limited rights against such persons than they would have absent the limitations in our Partnership Agreement. Indemnification of our Managing Partner and general partners could deplete our assets unless our indemnification obligation is covered by insurance. While we may attempt to purchase or maintain liability insurance to provide for our indemnification obligation, such insurance may not be available at a reasonable price or at all. At present, we have no coverage. Our Partnership Agreement does not provide for indemnification of limited partners. RISK OF LOSS The Interests are equity interests in the Partnership. As a result, and in accordance with our Partnership Agreement, the right of return of our limited partners Capital Contribution is subordinate to all existing and future claims of our general creditors, including any of our subordinated creditors. In the event of a partial or total liquidation of our Partnership or in the event there were insufficient Partnership assets to satisfy the claims of our general creditors, the limited partners may not be entitled to receive their entire Capital Contribution amounts back. Limited partner capital accounts are not guaranteed. However, as a class, the limited partners would be entitled to receive their aggregate Capital Contributions back prior to the return of any capital contributions to the subordinated limited partners or the general partners pursuant to Section 8.2 of our Partnership Agreement. If we suffer losses in any year but liquidation procedures described above are not undertaken and the Partnership continues, the amounts of such losses would be absorbed in the capital accounts of our partners as described in our Partnership Agreement and in Description of the Interests Distribution of Net Income; Allocation of Net Loss below, and each limited partner in any event remains entitled to receive the annual 7 1/2% Payment on his or her contributed capital under the terms of the Partnership Agreement. As described below under the heading Material United States Tax Consequences, this 7 1/2% Payment is characterized as a guaranteed payment under applicable federal tax law (and is Table of Contents described as such in the Partnership Agreement) because the amount is allocated to the limited partners even if the Partnership does not have net profits to cover such payment. However, as there would be no accumulated profits in such a year, limited partners would not receive any sums representing participation in net income of our Partnership. In addition, although the amount of such annual 7 1/2% Payment to limited partners is charged as an expense to us and is payable whether or not we earn any accumulated profits during any given period, no reserve fund has been set aside to enable us to make such fixed payments. Therefore, such annual 7 1/2% Payment to the limited partners is subject to our ability to service the payment, of which there is no assurance. FOREIGN EXCHANGE RISK FOR CANADIAN RESIDENTS Each foreign limited partner has the risk that he or she will lose value on his or her investment in the Interests due to fluctuations in the applicable exchange rate; furthermore, foreign limited partners may owe tax on a disposition of the Interests solely as the result of a movement in the applicable exchange rate. All investors, including those located in Canada, will purchase the Interests using U.S. dollars. As a result, limited partners in Canada may risk having the value of their investment, expressed in Canadian currency, decrease over time due to movements in the applicable currency exchange rates. Accordingly, a limited partner may have a loss upon disposition of his or her investment solely due to a downward fluctuation in the applicable exchange rate. In addition, changes in exchange rates could have an impact on Canadian federal income tax consequences for a limited partner, if such limited partner is a resident in Canada for purposes of the Income Tax Act (Canada). The disposition by such limited partner of an Interest, including on and as a result of the withdrawal of the limited partner or our dissolution, may result in the realization of a capital gain (or capital loss) by such limited partner. The amount of such capital gain (or capital loss) generally will be the amount, if any, by which the proceeds of disposition of such Interest, less any reasonable costs of disposition, each expressed in Canadian currency using the exchange rate on the date of disposition, exceed (or are exceeded by) the adjusted cost base of such Interest, expressed in Canadian currency using the exchange rate on the date of each transaction that is relevant in determining the adjusted cost base. Accordingly, because the exchange rate for those currencies may fluctuate between the date or dates on which the adjusted cost base of a limited partner s Interest is determined and the date on which the Interest is disposed of, a Canadian-resident limited partner may realize a capital gain or capital loss on the disposition of his or her Interest solely as a result of fluctuations in exchange rates. TAX RISKS Limited partners may be subject to alternative minimum tax or passive loss rules as a result of the investment. Limited partners generally will be allocated their allocable share of all of our tax attributes, including an allocable share of our items of tax preference. If a limited partner is otherwise subject to the alternative minimum tax, such tax would also be applied against items of tax preference from us. If a limited partner is not otherwise subject to the alternative minimum tax, it is possible that a limited partners allocable share of our tax preferences could cause the limited partner to become subject to the alternative minimum tax. In addition, a limited partner s allocable share of our income or losses could be subject to the passive loss rules. Under specific circumstances, certain of our income may be classified as portfolio income or passive income for purposes of the passive loss rules. In addition, under certain circumstances, a limited partner may be allocated a share of our passive losses, the deductibility of which will be limited by the passive loss rules. For further discussion, see the heading Material United States Tax Consequences. Table of Contents STATUS AS A PARTNER FOR TAX PURPOSES Limited partners may have an increased likelihood of adjustments to their tax returns as a result of any audits of us conducted by taxing authorities. Our income tax returns may be audited by governmental authorities. If the IRS or other taxing authority were to propose any adjustments to the treatment of one or more of our tax items, the unified audit procedures may cause limited partners to be bound by the outcome of such proceedings, both administrative and judicial. As a result, changes made to our returns would result in corresponding changes to the returns of a limited partner without the limited partner being able to contest such adjustments individually. Furthermore, an audit of our tax returns may result in an audit of the returns of limited partners. In addition, any amendments made by us to our tax returns may require limited partners to amend their personal income tax returns as well. For further discussion, see the heading Material United States Tax Consequences.

parsed_sections/risk_factors/2010/CIK0000821127_boston_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investment in our Securities involves a high degree of risk. You should carefully consider the risks described in the section Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009, which has been filed with the SEC and is incorporated herein by reference, in addition to the other information contained in this prospectus, in an applicable prospectus supplement, or incorporated by reference herein, before purchasing any of our Securities. Any of these risks could materially adversely affect our business, financial condition, results of operations, or ability to make distributions to our stockholders. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect us. In any such case, you could lose all or a portion of your original investment.

parsed_sections/risk_factors/2010/CIK0000829117_safe_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS The risk factors discussed below could cause our actual results to differ materially from those expressed in any forward-looking statements. See "DESCRIPTION OF BUSINESS - Forward-Looking Statements." Although we have attempted to list comprehensively these important factors, we caution you that other factors may in the future prove to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for us to predict all of these factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. The risks described below set forth what we believe to be the most material risks associated with the purchase of our common stock. Before you invest in our common stock, you should carefully consider these risk factors, as well as the other information contained in this prospectus. We may encounter unforeseen obstacles as we seek to implement our full Business Plan. Our current business plan has been formulated and implemented only within the past approximately one year. As a result, we do not have an established track record of success. We may encounter unforeseen obstacles as we seek to implement our full business plan. Our operating results may fluctuate significantly, which makes our future results difficult to predict and may cause our operating results to fall below expectations. Our results of operations for any period may not be comparable to the results of operations for any other period and should not be relied upon as indications of future performance. During the nine months ended September 30, 2010, we incurred a net loss of $ 373,6 51 . During the years ended December 31, 2009 and 2008, we incurred net losses of $389,041 and $292,027, respectively, and we incurred negative cash flows from operating activities of $184,788 and $78,321, respectively. We will need to generate significant revenue in order to achieve profitability and we may never become profitable. We may also have fluctuations in revenues, expenses and losses due to a number of factors, many of which are beyond our control. Accordingly our results of operations for any period may not be comparable to the results of operations for any other period and should not be relied upon as indications of future performance. Any acquisition, joint venture or strategic alliance in which we may invest may not produce the revenue, earnings, or business synergies that we anticipate. If appropriate opportunities present themselves, we may make acquisitions or enter into joint ventures or strategic alliances with other companies. There are inherent risks in any of these transactions, including the difficulty of integrating and assimilating the products, operations and personnel of combined companies; disruption of ongoing business; establishing and maintaining appropriate controls, procedures, and policies; and assumption of liabilities. Because of these potential risks, an acquisition, joint venture or strategic alliance in which we may invest may not produce the revenue, earnings, or business synergies that we anticipated. SAFE TECHNOLOGIES INTERNATIONAL INC. 80,000,000 Shares of Common Stock offered by the Company and 40,000,000 Shares of Common Stock offered by certain Selling Shareholders The continued deterioration of the economy and credit markets may adversely affect our future results of operations. Our operations and performance depend to some degree on general economic conditions and their impact on our customers finances and purchase decisions. As a result of recent economic events, potential customers may elect to defer purchases of technology products and services, such as the products we supply. Additionally, the credit markets and the financial services industry have been experiencing a period of upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States government. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on our customers ability to fund their operations thus adversely impacting their ability to purchase our products or to pay for our products on a timely basis, if at all. These and other economic factors could have a material adverse effect on demand for our products, the collection of payments for our products and on our financial condition and operating results. We must be able to adapt to rapidly changing technology trends and evolving industry standards or we risk our products becoming obsolete. The information technology services market in which we compete is characterized by intensive development efforts and rapidly advancing technology. Our future success will depend, in large part, upon our ability to anticipate and keep pace with advancing technology and competing innovations. Our success depends on our ability to implement managed, network and cloud services that anticipate and respond to rapid and continuing changes in technology, industry developments, and client needs. We may not be successful in identifying, developing and marketing new products or enhancing our existing products. We believe that a number of large companies, with significantly greater financial, manufacturing, marketing, distribution and technical resources and experience than ours, are focusing on the development of similar technology products. We may not have the financial resources, technical expertise, sales, and marketing abilities or support capabilities to compete successfully. The markets for our hosting, network and professional services are highly competitive, and we may not be able to compete effectively. We expect that competition will intensify in the future, and we may not have the financial resources, technical expertise, sales, and marketing abilities or support capabilities to compete successfully in these markets. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and greater market presence, lower costs of capital, and greater engineering and marketing capabilities and financial, technological, and personnel resources than we do. Failure of key third-party providers to supply products and services would impede the growth of our business, harm our reputation and cause our financial results to suffer. We depend on a number of third-party providers to supply products and services. For example, we lease or otherwise procure equipment from equipment providers, bandwidth capacity from telecommunications network providers in the quantities and quality we require, power services from local utilities, and equipment maintenance through third parties. While we have entered into various agreements for the provision of these products and services, any inability to obtain such products and services in a timely manner, in the quantities we require and of appropriate quality, would impede the growth of our business, harm our reputation and cause our financial results to suffer. Any of our providers could suffer financial failure and, as a result, become incapable of supplying the products and services for which we have contracted. If our providers fail to provide to us the required products and services, we could incur losses. Power outages and limited availability of internet resources may adversely affect our customers, operations and results. In today s world of technology, connectivity among the various technologies used to create and implement a technology environment is critical. While a significant portion of the services we provide to our customers is protection of their technology and data in the event of lost connectivity, we face similar issues in connection with our ability to provide constant protection. While we address this issue with redundant sources, there will always be a risk that one or more components of our services could experience a period of non-connectivity. We are registering the sale of 80,000,000 shares of our common stock, which will be sold to Kodiak Capital Group, LLC ( Kodiak ) pursuant to an Investment Agreement we entered into with Kodiak on August 17, 2010. Pursuant to the Investment Agreement, Kodiak has committed to purchase up to $5,000,000 of our common stock. We will sell the stock to Kodiak from time to time pursuant to puts which we will make to Kodiak as we need capital to implement our business plan. Kodiak s purchase price for the shares covered by each put will be ninety-four percent (94%) of the lowest daily volume weighted average price of our common stock during the five trading days after the date of our put notice to Kodiak. However, if the purchase price, as so calculated, is lower than a floor price specified by us in our put notice, then we may withdraw that put. We are also registering the resale of 40,000,000 shares of our common stock which were previously issued to certain shareholders in private transactions. As a result, the proceeds from sale of those 40,000,000 shares will not be received by us. The shares being offered by the selling shareholders will be sold by them from time to time either in the market or in one or more private transactions. Our common stock is traded on the Over the Counter Bulletin Board under the symbol SFAZ. Investing in our Common Stock involves risks that are described in the "Risk Factors" section beginning on page 2 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense. The date of this Prospectus is November *, 2010 Failures in our products or services, including our network, hosting and colocation services, the occurrence of a natural disaster, or human error, could disrupt our ability to provide services, increase our capital costs, result in a loss of customers, or otherwise negatively affect our business. Our ability to implement our business plan successfully depends upon our ability to provide high quality, reliable services. Interruptions in our ability to provide such services or failures in our products or services, through the occurrence of a natural disaster, human error, component or system failure, extreme temperature, or other unanticipated problem, could adversely affect our customers businesses and our business and reputation. Our network could be subject to unauthorized access, computer viruses, and other disruptive problems caused by customers, employees, or others. Unauthorized access, computer viruses, or other disruptive problems could lead to interruptions, delays, or cessation of service to our customers. Resolving network failures or alleviating security problems may also require interruptions, delays, or cessation of service to our customers and may result in significant liability, penalties, a loss of customers, and damage to our reputation. Litigation maybe necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others which could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm our business and operating results. We seek to protect our proprietary rights to our products and services through a combination of trademarks and copyrights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products and services, or obtain and use information that we consider proprietary. Litigation maybe necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm our business and operating results. We may not be able to locate suitable replacements should we lose the services of one or more of our key personnel. We are dependent on the talent and resources of a limited number of key personnel. These persons have extensive experience in the technology solutions business and their services are critical to our success. The market for personnel with the depth of experience we require is very competitive, and there can be no guarantee that we would be able to locate suitable replacements should we lose the services of one or more of our key personnel. Regulations may affect the ability of would-be purchasers of our common stock to buy or sell in the market. The Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks." A "penny stock" is any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Among other things, the rules impose special sales practice requirements upon broker-dealers that sell certain low priced stocks to persons other than established customers or accredited investors. For example, broker-dealers selling penny stocks must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in penny stocks. Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer s account by obtaining information concerning the customer s financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in penny stocks. Accordingly, the SEC s rules may limit the number of potential purchasers of shares of our common stock. Moreover, various state securities laws impose restrictions on transferring penny stocks, and, as a result, investors in our securities may have their ability to sell their securities impaired. Kodiak will pay less than the then-prevailing market price for our common stock under the Equity Facility. The common stock to be issued to Kodiak pursuant to the Equity Facility will be purchased at a 6% discount to the lowest volume weighted average price of our common stock during the five trading days following our delivery of a put notice to Kodiak. Subject to fluctuations in the market price of our stock, Kodiak will realize an immediate gain upon sale of the stock it purchases from us. When Kodiak sells the shares, the price of our common stock could decrease. Existing shareholders could experience a substantial dilution upon the issuance of common stock pursuant to the Equity Facility. Based on the closing price of our common stock on November 15 , 2010, the number of shares that would be sold to Kodiak under the Equity Facility would be approximately 156,000,000 shares. That number of shares would represent approximately 33 % of our total outstanding stock after the issuance, so that a holder of a 1% share of the Company would hold a .67 % share of the Company after full utilization of the funds available under the Equity Facility . If our stock price decreases, including any decreases in price attributable to sales by Kodiak of shares purchased from us under the Equity Facility, we may issue more than the 80,000,000 shares of common stock being registered at this time in order to realize the entire $5,000,000 available under the Equity Facility. Any additional issuances of common stock will further dilute the percentage ownership interest of existing shareholders. Our two largest shareholders hold significant control over our common stock and they may be able to control our Company indefinitely. Our two largest shareholders currently have beneficial ownership of approximately 72% of our outstanding common stock. These significant stockholders therefore have considerable influence over the outcome of all matters submitted to our stockholders for approval, including the election of directors, the approval of significant corporate transactions, and the authorization for issuance of additional shares, which would be necessary to access all of the funds available under the Equity Facility if the market price of our stock does not increase from its current level. We may not be able to access sufficient funds under the Equity Facility when needed. Our ability to put shares to Kodiak and obtain funds under the Equity Facility is limited by the terms and conditions in the Equity Facility , including restrictions on when we may exercise our put rights, restrictions on the amount we may put to Kodiak at any one time, which is determined in part by the trading volume of our common stock, and a limitation on Kodiak s obligation to purchase if such purchase would result in Kodiak beneficially owning more than 4.99% of our common stock. Therefore, our ability to access the bulk of the funds available under the Equity Facility depends in part on Kodiak s sale of stock purchased from us in prior puts. Accordingly, the Equity Facility may not be available at any given time to satisfy our funding needs. If an active, liquid trading market for our common stock does not develop, you may not be able to sell your shares quickly or at or above the price you paid for it. Although our common stock currently trades on the Over-the-Counter Bulletin Board, an active and liquid trading market for our common stock has not yet and may not ever develop or be sustained. You may not be able to sell your shares quickly or at or above the price you paid for our stock if trading in our stock is not active. We do not expect to pay dividends in the foreseeable future. We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. We currently plan to use all funds generated by operations for reinvestment in our operating activities. Investors should not count on dividends in evaluating an investment in our common stock.

parsed_sections/risk_factors/2010/CIK0000832488_mam_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the specific risks described below, the risks described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and any risks described in our other filings with the Securities and Exchange Commission, pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act ) before making an investment decision. See the section of this prospectus entitled Where You Can Find More Information. Any of the risks we describe below or in the information incorporated herein by reference could cause our business, financial condition, results of operations or future prospects to be materially adversely affected. Our business strategy involves significant risks and could result in operating losses. The market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations or future prospects. Some of the statements in this section of the prospectus are forward-looking statements. For more information about forward-looking statements, please see the section of this prospectus entitled Cautionary Note Regarding Forward-Looking Statements. Risks Related to the Rights Offering IF YOU DO NOT EXERCISE YOUR SUBSCRIPTION RIGHTS, YOUR OWNERSHIP INTEREST WILL BE DILUTED UPON THE COMPLETION OF THE RIGHTS OFFERING. The rights offering will result in the Company having more shares of its common stock issued and outstanding. To the extent that you do not exercise your rights under the rights offering and the Company s shares being offered pursuant thereto are purchased by other shareholders, your proportionate ownership and voting interest in the Company will be reduced. As such, the percentage that your original shares represent of our outstanding common stock after the rights offering will be diluted. THE PRICE OF OUR COMMON STOCK IS VOLATILE AND MAY DECLINE EITHER BEFORE OR AFTER THE RIGHTS OFFERING EXPIRES. The market price of our common stock is subject to fluctuations in response to numerous factors, including factors that have little or nothing to do with us or our performance as a company. These fluctuations could materially reduce our stock price and include, among other things: actual or anticipated variations in our operating results and cash flow; the nature and content of our earnings releases, and our competitors and customers earnings releases; changes in financial estimates by securities analysts; business conditions in our markets, the general state of the securities markets and the market for common stock in companies similar to ours; the number of shares of our common stock outstanding; changes in capital markets that affect the perceived availability of capital to companies in our industries; governmental legislation or regulation; currency and exchange rate fluctuations; and general economic and market conditions. In addition, the stock market historically has experienced significant price and volume fluctuations which, at times, are unrelated to the operating performance of any particular company. We do not have control over these fluctuations, which may occur irrespective of our operating results or performance and may cause a decline in the market price of our common stock. THE SUBSCRIPTION PRICE DETERMINED FOR THE RIGHTS OFFERING IS NOT NECESSARILY AN INDICATION OF THE FAIR VALUE OF OUR COMMON STOCK. The subscription price for the shares of our common stock pursuant to the rights offering is $0.065 per share of our common stock. The subscription price was determined by members of a special committee of our board of directors and represents a discount to the market price of a share of common stock on the date that the subscription price was determined. Factors considered by the special committee included the market price of the common stock before the announcement of the rights offering, the business prospects of our company and the general condition of the securities market. No assurance can be given that the market price for our common stock during the rights offering will continue to be above or even equal to the subscription price or that a subscribing owner of rights will be able to sell the shares of common stock purchased in the rights offering at a price equal to or greater than the subscription price. ONCE YOU AGREE TO SUBSCRIBE TO OUR SHARES PURSUANT TO THE RIGHTS OFFERING, YOU ARE COMMITTED TO BUYING SHARES OF OUR COMMON STOCK AT A PRICE WHICH MAY BE ABOVE THE PREVAILING MARKET PRICE. Once you exercise your subscription rights, you may not revoke the exercise of such rights. The trading price of our common stock may decline before the rights offering is concluded or before the subscription rights expire. If you exercise your subscription rights and, thereafter, the trading price of our common stock decreases below the subscription price, you will have committed to buying shares of our common stock at a price above the prevailing market price, in which case you will have an immediate, unrealized loss. No assurance can be given that following the exercise of your subscription rights, you will be able to sell your shares of common stock at a price equal to or greater than the subscription price paid for such shares. As such, you may lose all or part of your investment in our common stock. Further, until the certificate representing the shares purchased under the rights offering is delivered to you, you will not be able to sell such shares of our common stock. IF YOU DO NOT ACT PROMPTLY AND FOLLOW THE SUBSCRIPTION INSTRUCTIONS, YOUR EXERCISE OF SUBSCRIPTION RIGHTS MAY BE REJECTED. Shareholders who desire to purchase shares in the rights offering must act promptly to ensure that all required forms and payments are actually received by the subscription agent before 5:00 p.m., New York time, on October 15, 2010, the expiration date of the rights offering, unless extended by us, in our sole discretion. If you are a beneficial owner of shares, but not a record holder, you must act promptly to ensure that your broker, bank, or other nominee acts for you and that all required forms and payments are actually received by the subscription agent before the expiration date of the rights offering. We will not be responsible if your broker, custodian, or nominee fails to ensure that all required forms and payments are actually received by the subscription agent before the expiration date of the rights offering. If you fail to complete and sign the required subscription forms, send an incorrect payment amount or otherwise fail to follow the subscription procedures of the rights offering, the subscription agent may reject your subscription or accept it only to the extent of the payment received. Neither we nor the subscription agent undertakes to contact you concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures. SIGNIFICANT SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SIGNIFICANT SALES THEREOF MAY OCCUR IN THE FUTURE COULD ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK. The sale of substantial amounts of our common stock could adversely affect the price of these securities. Sales of substantial amounts of our common stock in the public market, and the availability of shares for future sale could adversely affect the prevailing market price of our common stock and could cause the market price of our common stock to remain low for a substantial amount of time. WE MAY CANCEL THE RIGHTS OFFERING AT ANY TIME IN WHICH EVENT OUR ONLY OBLIGATION WOULD BE TO RETURN YOUR EXERCISE PAYMENTS. We may, in our sole discretion, decide not to continue with the rights offering or to cancel the same, in which case our only obligation would be to return to you, without interest or penalty, all subscription payments received by the subscription agent. DEPENDING ON THE LEVEL OF PARTICIPATION IN THE RIGHTS OFFERING, WYNNEFIELD PERSONS MAY BE ABLE TO EXERCISE SUBSTANTIAL CONTROL OVER MATTERS REQUIRING SHAREHOLDER APPROVAL UPON COMPLETION OF THE OFFERING. On the record date of the rights offering, Wynnefield Persons collectively beneficially owned 12.61% of the outstanding shares of the Company s common stock. As a shareholder as of the record date, Wynnefield Persons will have the right to subscribe for and purchase shares of our common stock under both the basic subscription and oversubscription rights provided by the rights offering. Wynnefield Persons has indicated to us that it intends to exercise all of its basic subscription rights, but has not made any formal commitment to do so. Wynnefield Persons has also indicated that it intends to oversubscribe for the maximum amount of shares for which it can oversubscribe without endangering the availability of the Company s net operating loss carryforwards under Section 382 of the Internal Revenue Code. However, there is no guarantee or commitment that Wynnefield Persons will ultimately decide to exercise any of its rights, including its basic subscription or oversubscription rights. If Wynnefield Persons exercises its rights in the rights offering and a significant number of other shareholders do not exercise their rights, the ownership percentage of Wynnefield Persons following completion of the offering may increase to greater than 50% of the outstanding shares of the Company s common stock. If this were to occur, Wynnefield Persons would be able to exercise substantial control over matters requiring shareholder approval. Your interests as a holder of common stock may differ from the interests of Wynnefield Persons. Risks Related to Our Common Stock ADDITIONAL ISSUANCES OF OUR SECURITIES WILL DILUTE YOUR STOCK OWNERSHIP AND COULD AFFECT OUR STOCK PRICE. As of August 31, 2010, there were 85,860,185 shares of our common stock and 1,792,662 shares of Series A Preferred Stock issued and outstanding. Our Articles of Incorporation authorize the issuance of an aggregate of 150,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, on such terms and at such prices as our board of directors may determine. These shares are intended to provide us with the necessary flexibility to undertake and complete plans to raise funds if and when needed. Although we have not entered into any agreements relating to any future acquisitions, we may do so in the future. Any such acquisition may entail the issuances of securities that would have a dilutive effect on current ownership of our common stock. The market price of our common stock could fall in response to the sale or issuance of a large number of shares, or the perception that sales of a large number of shares could occur. CONCENTRATED OWNERSHIP OF OUR COMMON STOCK CREATES A RISK OF SUDDEN CHANGE IN OUR SHARE PRICE. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large shareholders of a significant portion of that shareholder s holdings could have a material adverse effect on the market price of our common stock. As of August 31, 2010, certain shareholders owned common stock and warrants to purchase approximately 29.2% of our outstanding common stock. As such, any sale by these large shareholders of a significant number of our shares could create a decrease in the price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly. THE MARKET FOR OUR COMMON STOCK IS LIMITED AND YOU MAY NOT BE ABLE TO SELL YOUR COMMON STOCK. Our common stock is currently quoted on the Over the Counter Bulletin Board, and is not traded on a national securities exchange. The market for purchases and sales of our common stock is limited and therefore the sale of a relatively small number of shares could cause the price to fall sharply. Accordingly, it may be difficult to sell shares quickly without depressing the value of our common stock significantly. Unless we are successful in developing continued investor interest in our stock, sales of our common stock could continue to result in major fluctuations in the price thereof. WE DO NOT INTEND TO DECLARE DIVIDENDS ON OUR COMMON STOCK. We will not distribute dividends to our shareholders until and unless we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. The time frame for that is inherently unpredictable, and no shareholder should expect to receive dividends in the near future, or at all. THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS. The market price of the securities of software companies has been especially volatile. Thus, the market price of our common stock is likely to be subject to wide fluctuations. If our revenues do not grow, or if such revenues grow at a slower pace than anticipated, or, if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, the market price of our common stock could decline. If the stock market in general experiences a loss in investor confidence or otherwise fails, the market price of our common stock could fall for reasons unrelated to our business, results of operations and financial condition. The market price of our stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. SINCE OUR STOCK IS CLASSIFIED AS A PENNY STOCK, THE RESTRICTIONS OF THE SECURITIES AND EXCHANGE COMMISSION S PENNY STOCK REGULATIONS MAY RESULT IN LESS LIQUIDITY FOR OUR STOCK. The US Securities and Exchange Commission (the SEC ) has adopted regulations which define a penny stock to be any equity security that has a market price (as therein defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transactions involving a penny stock, unless exempt, the rules require the delivery, prior to any transaction involving a penny stock by a retail customer, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker/dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Because the market price for our shares of common stock is less than $5.00, our securities are classified as penny stock. As a result of the penny stock restrictions, brokers or potential investors may be reluctant to trade in our securities, which may result in less liquidity for our stock. Risks Related to Our Business WE HAVE A LIMITED OPERATING HISTORY THAT MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND TO PREDICT OUR FUTURE OPERATING RESULTS. We were known as W3 Group, Inc. and we had no operations in December 2005, at which time we engaged in a reverse acquisition; therefore, we have limited historical operations. Two of our subsidiaries, MAM Software, Ltd. and AFS Tire Management, Inc. (f/k/a CarParts Technologies, Inc.) have operated since 1984 and 1997, respectively, as independent companies under different management until our former parent, ADNW, acquired MAM Software in April 2003 and CarParts Technologies, Inc. in August 2004. Since the reverse merger in December 2005, we have been primarily engaged in organizational activities, including developing a strategic operating plan and developing, marketing and selling our products. In particular, we had integrated a third subsidiary as a result of the acquisition of EXP from ADNW in August 2006, its MMI Automotive subsidiary. In February 2007, we acquired DSS from ADNW, which owned a minority interest of DCS Automotive Limited. On November 12, 2007, we sold EXP and DSS, which was EXP s wholly owned subsidiary. As a result of our limited operating history, it will be difficult to evaluate our business and predict our future operating results. WE MAY FAIL TO ADDRESS RISKS WE FACE AS A DEVELOPING BUSINESS WHICH COULD ADVERSELY AFFECT THE IMPLEMENTATION OF OUR BUSINESS PLAN. We are prone to all of the risks inherent in the establishment of any new business venture. You should consider the likelihood of our future success to be highly speculative in light of our limited operating history, as well as the limited resources, problems, expenses, risks and complications frequently encountered by entities at our current stage of development. To address these risks, we must, among other things, implement and successfully execute our business and marketing strategy; continue to develop new products and upgrade our existing products; respond to industry and competitive developments; attract, retain, and motivate qualified personnel; and obtain equity and debt financing on satisfactory terms and in timely fashion in amounts adequate to implement our business plan and meet our obligations. We may not be successful in addressing these risks. If we are unable to do so, our business prospects, financial condition and results of operations would be materially adversely affected. WE MAY FAIL TO SUCCESSFULLY DEVELOP, MARKET AND SELL OUR PRODUCTS. To achieve profitable operations, we, along with our subsidiaries, must continue successfully to improve, market and sell existing products and develop, market and sell new products. Our product development efforts may not be successful. The development of new software products is highly uncertain and subject to a number of significant risks. The development cycle - from inception to installing the software for customers - can be lengthy and uncertain. The ability to develop and market our products is unpredictable and may be subject to delays which are beyond our control. Potential products may appear promising at early stages of development, and yet may not reach the market for a number of reasons. WE MAY ENCOUNTER SIGNIFICANT FINANCIAL AND OPERATING RISKS IF WE GROW OUR BUSINESS THROUGH ACQUISITIONS. As part of our growth strategy, we may seek to acquire or invest in complementary or competitive businesses, products or technologies. The process of integrating acquired assets into our operations may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for our ongoing business activities. Although at this time, no agreements have been entered into relating to an acquisition or investment in a complementary or competitive business, we may, in the future, allocate a significant portion of our available working capital to finance all or a portion of the purchase price relating to such possible acquisitions. Any future acquisition or investment opportunity may require us to obtain additional financing to complete the transaction. The anticipated benefits of any acquisitions may not be immediately realized, or at all. In addition, future acquisitions by us could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect our operating results and financial position. Acquisitions also involve other risks, including entering markets in which we have no or limited prior experience. AN INCREASE IN COMPETITION FROM OTHER SOFTWARE MANUFACTURERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO GENERATE REVENUE AND CASH FLOW. Competition in our industry is intense. Potential competitors in the U.S. and Europe are numerous. Most competitors have substantially greater capital resources, marketing experience, research and development staffs and facilities than we have. Our competitors may be able to develop products before us, develop more effective products or market such products more effectively than us, which would limit our ability to compete effectively and consequently, our ability to generate revenue and cash flow. THE PRICES WE CHARGE FOR OUR PRODUCTS MAY DECREASE AS A RESULT OF COMPETITION AND OUR REVENUES COULD DECREASE AS A RESULT. We face potential competition from very large software companies, including Oracle, Microsoft and SAP that could offer Enterprise Resource Planning ( ERP ) and Supply Chain Management ( SCM ) products to our target market of small- to medium-sized businesses servicing the automotive aftermarket. To date, we have directly competed with one of these larger software and service companies. There can be no assurance that these companies will not develop or acquire a competitive product or service in the future. Our business would be dramatically affected by an increase in competition, which may drive us to decrease the prices of our products in response to software companies attempts to gain market share through the use of highly discounted sales and extensive marketing campaigns. IF WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, OUR TECHNOLOGIES AND PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE. The software industry is characterized by rapid and significant technological change. We expect that the software needs associated with the automotive technology will continue to develop rapidly, and our future success will depend on our ability to develop and maintain a competitive position through technological development. We cannot assure you that we will be able to respond to rapid changes in technology and that we will be able to maintain a competitive position. WE DEPEND ON PATENT AND PROPRIETARY RIGHTS TO DEVELOP AND PROTECT OUR TECHNOLOGIES AND PRODUCTS, WHICH RIGHTS MAY NOT OFFER US SUFFICIENT PROTECTION. The software industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend on our ability to obtain and enforce protection for products that we develop under US and foreign patent laws and other intellectual property laws, preserve the confidentiality of our trade secrets and operate without infringing the proprietary rights of third parties. We also rely upon trade secret protection for our confidential and proprietary information. Others may independently develop substantially equivalent proprietary information and techniques or gain access to our trade secrets or disclose our technology. We may not be able to meaningfully protect our trade secrets which could limit our ability to exclusively produce products. We require our employees, consultants, and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment or consulting relationships or collaboration with us. These agreements may not provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information. IF WE BECOME SUBJECT TO CLAIMS ALLEGING INFRINGEMENT OF THIRD-PARTY PROPRIETARY RIGHTS, WE MAY INCUR SUBSTANTIAL UNANTICIPATED COSTS AND OUR COMPETITIVE POSITION MAY SUFFER. We are subject to the risk that we are infringing on the proprietary rights of third parties. Although we are not aware of any infringement by our technology on the proprietary rights of others, and are not currently subject to any legal proceedings involving claimed infringements, we cannot assure you that we will not be subject to such third-party claims, litigation or indemnity demands in the future. If a claim or indemnity demand were to be brought against us, it could result in costly litigation or product shipment delays or force us to cease from selling such product or providing our services, or may even constrain us to enter into royalty or license agreements that have the effect of decreasing our revenue. OUR SOFTWARE AND INFORMATION SERVICES COULD CONTAIN DESIGN DEFECTS OR ERRORS WHICH COULD AFFECT OUR REPUTATION, RESULT IN SIGNIFICANT COSTS TO US AND IMPAIR OUR ABILITY TO SELL OUR PRODUCTS. Our software and information services are highly complex and sophisticated and could, from time to time, contain design defects or errors. We cannot assure you that these defects or errors will not delay the release or shipment of our products or, if the defect or error is discovered only after customers have received the products, that these defects or errors will not result in increased costs, litigation, customer attrition, reduced market acceptance of our systems and services or damage to our reputation. IF WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL OUR BUSINESS WILL SUFFER. We are highly dependent on the principal members of our management staff. We also rely on consultants and advisors to assist us in formulating our development strategy. Our success also depends upon retaining key management and technical personnel, as well as our ability to continue to attract and retain additional highly qualified personnel. We may not be successful in retaining our current personnel or hiring and retaining qualified personnel in the future. If we lose the services of any of our management staff or key technical personnel, or if we fail to continue to attract qualified personnel, our ability to acquire, develop or sell products would be adversely affected. IT MAY BE DIFFICULT FOR SHAREHOLDERS TO RECOVER AGAINST THOSE OF OUR DIRECTORS AND OFFICERS THAT ARE NOT RESIDENTS OF THE U.S. Two of our directors and one of our executive officers are residents of the United Kingdom. In addition, our significant operating subsidiary, MAM Software, is located in the United Kingdom. If one or more shareholders were to bring an action against us in the United States and succeed, either through default or on the merits, and obtain a financial award against an officer or director of the Company, that shareholder may be required to enforce and collect on his or her judgment in the United Kingdom, unless the officer or director owned assets which were located in the United States. Further, shareholder efforts to bring an action in the United Kingdom against its citizens for any alleged breach of a duty in a foreign jurisdiction may be difficult, as prosecution of a claim in a foreign jurisdiction, and in particular a foreign nation, is fraught with difficulty and may be effectively, if not financially, unfeasible. OUR MANAGEMENT AND INTERNAL SYSTEMS MIGHT BE INADEQUATE TO HANDLE OUR POTENTIAL GROWTH. Our success will depend in significant part on the expansion of our operations and the effective management of growth. This growth will place a significant strain on our management and information systems and resources and operational and financial systems and resources. To manage future growth, our management must continue to improve our operational and financial systems and expand, train, retain and manage our employee base. Our management may not be able to manage our growth effectively. If our systems, procedures, controls, and resources are inadequate to support our operations, our expansion would be halted and we could lose our opportunity to gain significant market share. Any inability to manage growth effectively may harm our ability to institute our business plan. BECAUSE WE HAVE INTERNATIONAL OPERATIONS, WE WILL BE SUBJECT TO RISKS OF CONDUCTING BUSINESS IN FOREIGN COUNTRIES. International operations constitute a significant part of our business, and we are subject to the risks of conducting business in foreign countries, including: difficulty in establishing or managing distribution relationships; different standards for the development, use, packaging and marketing of our products and technologies; our ability to locate qualified local employees, partners, distributors and suppliers; the potential burden of complying with a variety of foreign laws and trade standards; and general geopolitical risks, such as political and economic instability, changes in diplomatic and trade relations, and foreign currency risks and fluctuations. No assurance can be given that we will be able to positively manage the risks inherent in the conduct of our international operations or that such operations will not have a negative impact on our overall financial operations. WE WERE NOT IN COMPLIANCE WITH CERTAIN COVENANTS UNDER OUR SENIOR SECURED NOTE. WE HAVE RECEIVED WAIVERS ON THREE OCCASIONS OF THESE EVENTS OF DEFAULT FROM THE HOLDER OF THE NOTE. During the fiscal periods ended March 31, 2008, June 30, 2008 and December 31, 2008, we violated certain covenants related to cash flow ratios under our senior secured note with ComVest Capital LLC, dated December 21, 2007. ComVest has provided us a waiver of these events of default on each occasion. As of March 31, 2009 and June 30, 2009, we were in compliance with the amended loan covenants. As of March 31, 2010, we failed to meet the Earnings Before Interest Depreciation and Amortization ( EBIDA ) Ratio Covenant of 1.25:1 as required under our senior secured note with ComVest Capital LLC, dated December 21, 2007, as amended, which failure constitutes an event of default. The terms of the note provide that, if any event of default occurs, the full principal amount of the note, together with interest and other amounts owing in respect thereof to the date of acceleration, shall become, at ComVest s election, immediately due and payable in cash. On June 2, 2010 ComVest charged us a fee of $25,000 and on June 17, 2010 increased the interest rate on the Term Loan from 11% to 16% and increased the interest rate on the Revolving Credit Facility from 9.5% to 13.5%. We currently are in negotiations with ComVest to resolve the default, however, we cannot assure you that we will be successful, in which case ComVest could require full repayment of the loan, which would negatively impact our liquidity and our ability to operate. WE WILL NEED ADDITIONAL FINANCING OF $3,917,000 TO MAKE THE $2,917,000 BALLOON PAYMENT DUE IN NOVEMBER 2010 ON OUR TERM LOAN AND $1,000,000 DUE ON THE REVOLVING CREDIT FACILITY TO CONTINUE AS A GOING CONCERN, WHICH ADDITIONAL FINANCING MAY NOT BE AVAILABLE ON A TIMELY BASIS, OR AT ALL. We prepared our consolidated financial statements as of June 30, 2010 on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $23.4 million and a working capital deficit of $6.7 million at June 30, 2010. These factors, along with the $2,917,000 balloon payment due in November 2010 on the Term Loan and the $1,000,000 payment due in November 2010 on the Revolving Credit Facility, raise substantial doubt about the Company s ability to continue as a going concern unless we are able to secure additional funds. We may be required to pursue sources of additional capital to fund our operations through various means, which may consist of equity or debt financing, including a rights offering. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial results. As a result, there can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs on a timely basis, we may be required to cease operations.

parsed_sections/risk_factors/2010/CIK0000834285_republic_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS In addition to the other information included in this prospectus and any prospectus supplement, the following factors should be carefully considered in evaluating an investment in our common stock, our business, financial condition, results of operations, and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, or future prospects. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely affected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial condition, results of operations, or future prospects. In any such case, the market price of our common stock could decline substantially and you could lose all or a part of your investment. Risks Related to Our Business We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers. Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner. Lending money is an significant part of the banking business. Borrowers, however, do not always repay their loans. The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including credit risks of a particular borrower, changes in economic conditions, the duration of the loan and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors. Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely effected. Our non-performing assets were approximately $47.8 million and $39.6 million on March 31, 2010 and December 31, 2009, respectively. Our allowance for loan losses was approximately $13.7 million and $12.8 million on March 31, 2010 and December 31, 2009, respectively. Our loans which were between thirty and fifty-nine days delinquent totaled $23.1 million and $13.4 million on March 31, 2010 and December 31, 2009, respectively. Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance. A substantial portion of our loan portfolio 71.9% as of March 31, 2010 is comprised of commercial real estate loans. The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration. Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending. In addition, commercial real estate lenders are making greater provisions for loan losses and accumulating higher capital levels as a result of commercial real estate lending exposures. Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect or business, financial condition and results of operations. Our allowance for loan losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for loan losses and charge off additional loans in the future, which could materially and adversely affect our business. We attempt to maintain an allowance for loan losses, established through a provision for loan losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio. If our allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and results of operations. The determination of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. Increases in nonperforming loans have a significant impact on our allowance for loan losses. Our allowance for loan losses may not be adequate to absorb actual loan losses. If current trends in the real estate markets continue, we could continue to experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to-four family residential mortgage loans. Moreover, we expect that the current recession will negatively impact economic conditions in our market areas and that we could experience significantly higher delinquencies and credit losses. As a result, we will continue to make provisions for loan losses and to charge off additional loans in the future, which could materially adversely affect our financial conditions and results of operations. In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for loan losses and may require us to increase the provision for loan losses or to recognize further loan charge-offs, based on judgments that differ from those of our management. If loan charge-offs in future periods exceed the allowance for loan losses, we will need to increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in our allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows. We are required to make significant estimates and assumptions in the preparation of our financial statements, including with respect to our allowance for loan losses, and our estimates and assumptions may not be accurate. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, require our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. Critical estimates are made by management in determining, among other things, the allowance for loan losses, carrying values of other real estate owned, and income taxes. If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely effected. Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio. During 2008 and 2009, we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank s ability pay dividends, which could materially adversely affect us and our ability to pay dividends to shareholders. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as well-capitalized for regulatory purposes. Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates. Our net income depends on the net income of the Bank, and the Bank is dependent primarily upon its net interest income, which is the difference between the interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Our results of operations will be effected by changes in market interest rates and other economic factors beyond our control. If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates. Conversely, if liabilities reprice more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates. At any time, our assets and liabilities will reflect interest rate risk of some degree. In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed- and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets. Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse affect on our results of operations. We are a holding company dependent for liquidity on payments from our banking subsidiary, which payments are subject to restrictions. We are a holding company and depend on dividends, distributions and other payments from the Bank to fund dividend payments, if any, and to fund all payments on obligations. The Bank and its subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us. Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any. In addition, our right to participate in a distribution of assets upon a subsidiary s liquidation or reorganization is subject to the prior claims of the subsidiary s creditors. Increases in FDIC insurance premiums may have a material adverse effect on our results of operations. During 2008 and 2009, higher levels of bank failures have dramatically increased resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increase federal deposit insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of insured institutions uniformly by seven cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes beginning April 1, 2009, which require riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels. To further support the rebuilding of the deposit insurance fund, the FDIC imposed a special assessment on each insured institution, equal to five basis points of the institution s total assets minus Tier 1 capital as of September 30, 2009. For us, this represents an aggregate charge of approximately $0.4 million, which was recorded as a pre-tax charge during the second quarter of 2009. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments. In November 2009, the FDIC also imposed a 13-quarter prepayment of FDIC premiums. The prepayment will be used to offset future FDIC premiums beginning with the March 31, 2010 payment. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums. Our expenses for the year ended December 31, 2009 have been significantly and adversely affected by these increased premiums and the special assessment. These increases and assessment and any future increases in insurance premiums or additional special assessments may materially adversely affect our results of operations. Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area. Our primary service area consists of Greater Philadelphia and Southern New Jersey. Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area. Although our customers businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations. Economic and financial market conditions in the United States and around the world may remain depressed for the foreseeable future. Conditions such as slow or negative growth and the sub-prime debt devaluation crisis have resulted in a low level of liquidity in many financial markets and extreme volatility in credit, equity and fixed income markets. These economic developments could have various effects on our business, including: increasing our credit risk, by increasing the likelihood that major customers of ours become insolvent and unable to satisfy their obligations to us; impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and limiting our interest income, by depressing the yields we are able to earn on our investment portfolio. These potential effects are difficult to forecast and mitigate. Distress in the credit markets and issues relating to liquidity among financial institutions have resulted in the failure of some financial institutions and others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps in an effort to stabilize the financial system, including investing in financial institutions. These efforts, however, may not succeed. Our business and our financial condition and results of operations could be adversely affected by continued or accelerated disruption and volatility in financial markets, continued capital and liquidity concerns regarding financial institutions, limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system, and recessionary conditions that are deeper or longer lasting than currently anticipated. Our ability to use net operating loss carryforwards to reduce future tax payments may be limited. As of March 31, 2010, we had approximately $3.9 million of U.S. Federal net operating loss carryforwards, referred to as NOLs, available to reduce taxable income in future years. Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the Code. These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. The issuance of securities in connection with this offering may have resulted in an ownership change, or could result in an ownership change in the future upon subsequent dispositions of our stock. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. Our use of NOLs arising after the date of an ownership change would not be affected. In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 31, 2009 and December 31, 2008. There are no NOLs that could expire if not utilized for the year ending December 31, 2010. Our assets as of March 31, 2010 included a deferred tax asset and we may not be able to realize the full amount of such asset. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At March 31, 2010, the net deferred tax asset was approximately $9.7 million, up from a balance of approximately $6.3 million at March 31, 2009. The increase in net deferred tax asset resulted mainly from the allowance for loan losses recorded for financial reporting purposes, which are not currently deductible for federal income tax reporting purposes. The net deferred tax asset balance at March 31, 2010 attributable to the allowance for loan losses was $4.9 million. We regularly review our deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. We believe the recorded net deferred tax asset at March 31, 2010 is fully realizable; however, if we determine that we will be unable to realize all or part of the net deferred tax asset, we would adjust this deferred tax asset, which would negatively impact our earnings or increase our net loss. We may not be able to manage our growth, which may adversely impact our financial results. As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing stores of other financial institutions. To the extent that we undertake additional stores openings and acquisitions, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management s time and attention and general disruption to our business. As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey. We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores. In addition, the organizational and overhead costs may be greater than we anticipate. New stores may take longer than expected to reach profitability, or may not become profitable. The additional costs of starting new stores may adversely impact our financial results. Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs, such growth could adversely impact our earnings and financial condition. We are planning to rebrand Republic First Bank as Republic Bank and the rebranding may be more costly than anticipated or may fail to achieve its intended result. In connection with our change in strategy to internally grow our brand, we are planning to rebrand our stores and begin operating under the name, Republic Bank, the name under which the Bank was incorporated and under which it did business from 1988 until 1996. The rebranding is expected to occur during the next several months. Several companies in the United States, including companies in the banking and financial services industries, use variations of the word Republic, as well as a stylized "R," as part of a trademark or trade name. As such, we face potential objections to our use of these marks. If there are any objections, we may incur additional costs to defend our use, and may be required to further rebrand our banking business. Our rebranding efforts may not achieve their intended results, which include enhancing our brand and increasing our retail business. Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations. Since June 2008, we have been successful in attracting new, talented management to the Bank, to add to our management team. Many of these new people joined us when we were planning to merge with Metro Bancorp, Inc. We believe that our ability to successfully implement our retail strategy will require us to retain and attract additional management experienced in banking and financial services, and familiar with the communities in our market. Our ability to retain executive officers, the current management teams, branch managers and loan officers of the Bank will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. We are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations. We and the Bank operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Company, or FDIC, and the Pennsylvania Department of Banking. We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than for investors. We are also subject to comprehensive examination and supervision by banking and other regulatory bodies. Examination reports and ratings (which often are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, growth, and profitability of our businesses. In response to our May 2009 examination, the Bank and its board entered into an informal agreement with the FDIC and the Pennsylvania Department of Banking to enhance a variety of the Bank s policies, procedures and processes regarding asset quality, earnings and loan concentrations. Similarly, following our March 2008 compliance examination, the Bank and its board entered into an informal agreement with the FDIC. The Bank was required to improve its policies, procedures and processes relating to its compliance monitoring functions. We have implemented a number of changes to the Bank s policies, procedures and processes, which we believe address most of the issues raised in these informal agreements. A failure to have adequate procedures to comply with regulatory requirements could expose us to damages, fines and regulatory penalties, which could be significant, and could also injure our reputation with customers and others with whom we do business. We are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. We face significant competition in our market from other banks and financial institutions. The banking and financial services industry in our market area is highly competitive. We may not be able to compete effectively in our markets, which could adversely affect our results of operations. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and consolidation among financial service providers. Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services. Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin. We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations. The financial services industry is constantly undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. If we are unable to do so, our competitive position and results of operations could be adversely affected. Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives. We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission, although we have not always so reported. We also maintain a system of internal control over financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny. We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations. If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders. Federal banking regulators require us and the Bank to maintain capital to support our operations. Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies. At March 31, 2010, our regulatory capital ratios were above well capitalized levels under current bank regulatory guidelines. To be well capitalized, banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us or the Bank to maintain higher regulatory capital ratios. For example, regulators recently have required some banks to attain a Tier 1 leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10%, and a total risk-based capital ratio of at least 12%. Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all. If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of investors, and could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price. We are exposed to environmental liabilities with respect to real estate that we have or had title to in the past. A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate, and in doing so could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards. If we were to become subject to significant environmental liabilities, it could materially and adversely effect us. A substantial decline in the value of our Federal Home Loan Bank of Pittsburgh common stock may adversely affect our financial condition. We own common stock of the Federal Home Loan Bank of Pittsburgh, or the FHLB, in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value and fair market value of our FHLB common stock was $6.7 million as of March 31, 2010. Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, the FHLB had notified its member banks that it had suspended dividend payments and the repurchase of capital stock until further notice is provided. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition. If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely affected. Risks Related to this Offering and Our Shares Our share price may fluctuate and this may make it difficult for you to resell shares of our common stock owned by you at times or at prices you find attractive. The market price of our common stock could be subject to significant fluctuations in response to many factors, including, but not limited to: actual or anticipated variations in our results of operations, liquidity or financial condition; changes in analysts estimates of our earnings; publication of research reports about us or the banking industry generally; changes in market valuations of similar companies; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee; general economic or business conditions, either nationally, regionally or in the communities in which we do business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and loan performance or a reduced demand for credit; continued levels of asset quality and loan origination volume; the adequacy of our allowance for loan losses; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); the willingness of customers to substitute competitors products and services for our products and services and vice versa, based on price, quality, relationship or otherwise; unanticipated regulatory or judicial proceedings, and related liabilities and costs; interest rate, market and monetary fluctuations; the timely development of competitive new products and services by us and the acceptance of such products and services by customers; changes in consumer spending and saving habits relative to the financial services we provide; the loss of certain key officers or other employees; continued relationships with major customers; our ability to continue to grow our business internally and through acquisition and successful integration of new or acquired entities while controlling costs; compliance with laws and regulatory requirements of federal, state and local agencies; the ability to hedge certain risks economically; effect of terrorist attacks and threats of actual war; deposit generation and flows; changes in accounting principles, policies and guidelines; rapidly changing technology; other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; other news, announcements or disclosures (whether by us or others) related to us or Republic; and our success at managing the risks involved in the foregoing. Stock markets, in general, have experienced over the past year, and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject to similar market fluctuations that may be unrelated to our operating performance or prospects. Increased market volatility could result in a substantial decline in the market price of our common stock. Our common stock is not insured by any governmental entity and, therefore, an investment in our common stock involves risk. Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC or any other governmental entity, and is subject to investment risk, including possible loss. There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock. Except as described under the section titled, Underwriting, beginning at page 94 of this prospectus, we are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock in the future will dilute the ownership interests of our existing shareholders. Additionally, the sale of substantial amounts of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether directly by us in this offering or future offerings or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity-related securities. We are party to a registration rights agreement with the holders of the convertible trust preferred securities of Republic First Bancorp Capital Trust IV, which requires us, under certain circumstances, to register up to 1.7 million shares of our common stock into which the trust preferred securities may be converted for resale under the Securities Act. In addition, our board of directors is authorized to designate and issue preferred stock without further shareholder approval, and we may issue other equity securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios and to comply with any future changes in regulatory standards. Our common stock is currently traded on the Nasdaq Global Market. During the twelve months ended March 31, 2010, the average daily trading volume for our common stock was approximately 32,696 shares. As a result, sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all. Our common stock is subordinate to our existing and future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries. Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our board of directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries liquidation or reorganization is subject to the prior claims of that subsidiary s creditors and preferred shareholders. As of March 31, 2010, we had $47.5 million of outstanding debt. Our ability to pay dividends depends upon the results of operations of our subsidiaries. Neither the Company nor the Bank has declared or paid cash dividends on its common stock since the Bank began operations. Our board of directors intends to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future. Holders of our common stock are entitled to receive dividends if, as and when declared from time to time by our board of directors in its sole discretion out of funds legally available for that purpose, after debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if any. While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to the Bank, our ability to pay dividends to the holders of our common stock will depend to a large extent upon the amount of dividends paid by the Bank to us. Regulatory authorities restrict the amount of cash dividends the Bank can declare and pay without prior regulatory approval. Presently, the Bank cannot declare or pay dividends in any one year in excess of retained earnings for that year subject to risk based capital requirements. This offering is expected to be dilutive. Giving effect to the issuance of common stock in this offering, we expect that this offering will have a dilutive effect on our expected earnings per common share. The actual amount of dilution cannot be determined at this time and will be based on numerous factors. If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, current and potential shareholders may lose confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management s report on internal control over financial reporting. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended December 31, 2009, or in our Form 10-Q for the quarter ended March 31, 2010, we cannot guarantee that we will not have any material weaknesses reported by our independent registered public accounting firm in the future. Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future, we fail to complete this evaluation in a timely manner, or if our independent registered public accounting firm cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to maintain an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business. Our governing documents, Pennsylvania law, and current policies of our board of directors contain provisions which may reduce the likelihood of a change in control transaction that may otherwise be available and attractive to shareholders. Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our board of directors. In particular, the articles of incorporation and bylaws: classify our board of directors into three groups, so that shareholders elect only approximately one-third of the board each year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates for election to the board of directors or to make shareholder proposals at a shareholders meeting; require the vote of the holders of at least 60% of the Company s voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of the Company s voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our board of directors. These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of our board of directors. Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation. In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold. For example, Pennsylvania law may restrict a third party s ability to obtain control of the Company and may prevent shareholders from receiving a premium for their shares of our common stock. Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation. Our executive officers, directors and principal shareholders own a significant percentage of our common stock, may purchase additional shares in this offering, and can significantly influence matters requiring approval by our shareholders. As of June 17, 2010, our executive officers and directors, in the aggregate, beneficially owned approximately 23.0% of our common stock, and had the right to vote approximately 19.3% of our outstanding common stock, and other principal shareholders, those beneficially owning five percent or more of our common stock, beneficially owned approximately 8.0% of our common stock, owned and had the right to vote approximately 0% of our outstanding common stock. These shareholders, acting together, would be able to influence matters requiring approval by our shareholders, including the election of directors. This concentration of ownership might also have the effect of delaying or preventing a change in control of the company. At our request, the underwriters have reserved for sale up to 30% of the shares of our common stock to be sold in this offering, to certain of our directors, officers and convertible trust preferred holders. Harry D. Madonna, our chairman, president and chief executive officer, and Vernon W. Hill, II, our consultant and principal beneficial stockholder and convertible trust preferred holder, have expressed an interest in maintaining their pro rata interests in our common stock through this offering. None of our directors, officers or convertible trust preferred holders has any obligation or made any commitment to purchase any shares in this offering, and there can be no assurance as to the number of shares in this offering they may purchase, if any.

parsed_sections/risk_factors/2010/CIK0000840889_doral_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ risk factors incorporated by reference herein from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 10, 2010. Those risks are not the only risks we face. Additional risks and uncertainties we do not yet know of or we currently judge to be immaterial may also impair our business, financial condition or results of operations. If any of the events or circumstances described in these risks or other material actually occurs, our business, financial condition or results of operations could be materially and adversely affected. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains or incorporates statements that we believe are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act ), and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and Rule 3b-6 promulgated thereunder, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Company s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan and lease losses, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Company s financial condition and results of operations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and are generally identified by the use of words or phrases such as believes, expects, anticipates, plans, trend, objective, continue, remain, pattern or similar expressions or future conditional verbs such as will, would, should, could, might, can, may or similar expressions. We caution readers not to place undue reliance on any of these forward-looking statements since they speak only as of the date made and represent Doral Financial s expectations of future conditions or results and are not guarantees of future performance. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of those statements. Forward-looking statements are, by their nature, subject to risks and uncertainties. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain important factors that could cause actual results to differ materially from those contained in any forward-looking statement: the continued recessionary conditions of the Puerto Rico and the United States economies and the continued weakness in the performance of the United States capital markets leading to, among other things, (i) a deterioration in the credit quality of our loans and other assets, (ii) decreased demand for our products and services and lower revenue and earnings, (iii) reduction in our interest margins, and (iv) decreased availability and increased pricing of our funding sources, including brokered certificates of deposit; the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their respective impact in the credit quality of our loans and other assets, which may lead to, among other things, an increase in our non-performing loans, charge-offs and loan loss provisions; a decline in the market value and estimated cash flows of our mortgage-backed securities and other assets may result in the recognition of other-than-temporary impairment of such assets under generally accepted accounting principles in the United States ( GAAP ); our ability to derive sufficient income to realize the benefit of our deferred tax assets; uncertainty about the legislative and other measures adopted by the Puerto Rico government in response to its fiscal situation and the impact of such measures on several sectors of the Puerto Rico economy; Table of Contents EXHIBIT INDEX Exhibit Number Description 3 .1 Certificate of Incorporation of Doral Financial, which incorporates the certificates of designation of Doral Financial s 7% Noncumulative Monthly Income Preferred Stock, Series A; Doral Financial s 8.35% Noncumulative Monthly Income Preferred Stock, Series B; Doral Financial s 7.25% Noncumulative Monthly Income Preferred Stock, Series C; and Doral Financial s 4.75% Perpetual Cumulative Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.1(j) of Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 3 .2 Bylaws of Doral Financial, as amended on August 2, 2007. (Incorporated herein by reference to Exhibit 3.1 of Doral Financial s Current Report on Form 8-K filed with the Commission on August 6, 2007.) 3 .3 Certificate of Amendment of the Certificate of Incorporation of Doral Financial dated March 12, 2010. (Incorporated herein by reference to Exhibit 3.1 of Doral Financial s Current Report on Form 8-K filed with the Commission on March 16, 2010.) 3 .4 Certificate of Designation of Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock (including form of stock certificate). (Incorporated herein by reference to Exhibit 3.1 of Doral Financial s Current Report on Form 8-K filed with the Commission on April 26, 2010.) 4 .1 Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 4 .2 Loan and Guaranty Agreement among Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ( AFICA ), Doral Properties, Inc. and Doral Financial. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .3 Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by reference to exhibit number 4.2 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .4 Form of Serial and Term Bond (included in Exhibit 4.3 hereof). 4 .5 Deed of Constitution of First Mortgage over Doral Financial Plaza. (Incorporated herein by reference to exhibit number 4.4 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .6 Mortgage Note secured by First Mortgage referred to in Exhibit 4.5 hereto (included in Exhibit 4.5 hereof). 4 .7 Pledge and Security Agreement. (Incorporated herein by reference to exhibit number 4.6 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .8 Indenture, dated May 14, 1999, between Doral Financial and U.S. Bank National Association, as trustee, pertaining to senior debt securities. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Current Report on Form 8-K filed with the Commission on May 21, 1999.) 4 .9 Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust Company, as trustee, pertaining to subordinated debt securities. (Incorporated herein by reference to exhibit number 4.3 of Doral Financial s Current Report on Form 8-K filed with the Commission on May 21, 1999.) 4 .10 Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred Stock, Series A. (Incorporated herein by reference to exhibit number 4(A) of Doral Financial s Registration Statement on Form S-3 filed with the Commission on October 30, 1998.) 4 .11 Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred Stock, Series B. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Registration Statement on Form 8-A filed with the Commission on August 30, 2000.) Table of Contents uncertainty about the effectiveness of the various actions undertaken to stimulate the United States economy and stabilize the United States financial markets, and the impact of such actions on our business, financial condition and results of operations; changes in interest rates, which may result from changes in the fiscal and monetary policy of the federal government, and the potential impact of such changes in interest rates on our net interest income and the value of our loans and investments; the commercial soundness of our various counterparties of financing and other securities transactions, which could lead to possible losses when the collateral held by us to secure the obligations of the counterparty is not sufficient or to possible delays or losses in recovering any excess collateral belonging to us held by the counterparty; our ability to collect payment of a receivable from Lehman Brothers, Inc. ( LBI ), which results from the excess of the value of securities owned by Doral Financial that were held by LBI above the amounts owed by Doral Financial under certain terminated repurchase agreements and forward agreement; higher credit losses because of federal or state legislation or regulatory action that either (i) reduces the amount that our borrowers are required to pay us, or (ii) limits our ability to foreclose on properties or collateral or makes foreclosures less economically feasible; developments in the regulatory and legal environment for financial services companies in Puerto Rico and the United States as a result of, among other things, recent legislative and regulatory proposals made by the federal government, which may lead to various changes in bank regulatory requirements, including required levels and components of capital; changes in our accounting policies or in accounting standards, and changes in how accounting standards are interpreted or applied; general competitive factors and industry consolidation; to the extent we make acquisitions, including FDIC-assisted acquisitions of assets and liabilities of failed banks, risks and difficulties relating to the acquired operations and to combining the acquired operations with our existing operations; potential adverse outcome in the legal or regulatory actions or proceedings described in Legal matters in the Company s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as updated from time to time in the Company s subsequent filings with the SEC; and the other risks and uncertainties incorporated by reference into Risk factors in this prospectus. You should refer to our periodic and current reports filed with the SEC for further information on other factors that could cause actual results to be significantly different from those expressed or implied by these forward-looking statements. See Where You Can Find More Information in this prospectus. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC s web site at www.sec.gov and on the Investor Relations page of our website at http://www.doralbank.com/en/. Information contained in or linked to our website is not a part of this prospectus. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street N.E., Washington, D.C. 20549. You can also obtain copies of the documents upon the payment of a duplicating fee to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. This prospectus omits some information contained in the registration statement in accordance with SEC rules and regulations. You should review the information and exhibits included in the registration statement for further information about us and the securities we are offering. Statements in this prospectus concerning any Table of Contents document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review the complete document to evaluate these statements. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to incorporate by reference information we file with it, which means that we can disclose important information to you by referring you to other documents. The information incorporated by reference is considered to be a part of this prospectus. We incorporate by reference the documents listed below, except, unless otherwise noted, to the extent that any information contained in such filings is deemed furnished in accordance with SEC rules: Our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC on February 26, 2010; Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010, filed with the SEC on May 10, 2010. Our Current Reports on Form 8-K filed with the SEC on May 13, 2010, June 25, 2010, June 30, 2010, July 30, 2010, August 2, 2010 and August 4, 2010 (including, with respect to the July 30, 2010 and August 2, 2010 reports, the information furnished therein); Our Definitive Proxy Statement on Schedule 14A filed with the SEC on June 11, 2010; The information specifically incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 from our Definitive Proxy Statement on Schedule 14A filed with the SEC on April 9, 2010; and The description of our common stock, which is registered under Section 12 of the Exchange Act, contained and incorporated by reference in our Form 8-A filed with the SEC on December 27, 2002, including any subsequently filed amendments and reports updating such description. These documents contain important information about us and our financial condition. Information contained in this prospectus supersedes information incorporated by reference that we have filed with the SEC prior to the date of this prospectus, while information included in any prospectus supplement or post-effective amendment will supersede this information. Our filings are available on the Investor Relations page of our website at http://www.doralbank.com/en/. Information contained in or linked to our website is not a part of this prospectus. You may also request a copy of these filings, at no cost, by writing or telephoning us at: Doral Financial Corporation Attention: Investor Relations 1451 Franklin D. Roosevelt Avenue San Juan, Puerto Rico 00920-2717 Telephone number: (787) 474-6683 Table of Contents USE OF PROCEEDS All securities sold pursuant to this prospectus will be offered and sold by the selling stockholders. We will not receive any of the proceeds from such sales. MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS, PURCHASES OF EQUITY SECURITIES AND STOCK-BASED COMPENSATION PLANS Our common stock, $0.01 par value per share, is traded and quoted on the NYSE under the symbol DRL. As of July 28, 2010, we had 107,614,606 shares of our common stock outstanding and 226 registered holders of our common stock, which does not include beneficial owners whose shares are held in record names of brokers or nominees. As of July 28, 2010, 48,412,698 shares of our common stock, or approximately 45% of the Company s voting securities, were held by our principal shareholder, Doral Holdings. Since the formation of Doral Holdings in 2007, these shares could only be sold upon the approval of at least four out of five members of the board of directors of Doral GP Ltd., the general partner of Doral Holdings, L.P. In connection with the dissolution of Doral Holdings and Doral Holdings, L.P., the assets of each of Doral Holdings and Doral Holdings, L.P., including the shares of our common stock currently held by Doral Holdings, will be distributed to the direct and indirect investors in Doral Holdings, L.P. Any such shares that are not held by investors that are our affiliates will be freely transferable. Additionally, the shares covered by this prospectus include 33,485,711 shares of our common stock currently held by Doral Holdings that will be distributed to investors, including investors who may be deemed to be our affiliates, following the dissolution of Doral Holdings. The table below sets forth, for the calendar quarters indicated, the high and low closing sales prices. Calendar Price Range Year Quarter High Low 2010 (3rd quarter through August 4, 2010) 3rd $ 2.70 $ 2.22 2nd 6.47 2.28 1st 5.22 3.08 2009 4th $ 3.80 $ 2.63 3rd 4.26 1.83 2nd 5.21 1.74 1st 8.44 1.80 2008 4th $ 11.48 $ 5.10 3rd 17.80 10.90 2nd 24.03 13.54 1st 22.42 17.53 As of August 4, 2010, the closing price for the common stock as quoted on the NYSE was $2.22 per share. Doral Financial has not paid quarterly dividends on common stock since April 25, 2006. For additional information regarding our dividend policy, please see Dividend Policy in this prospectus. For additional information regarding our common stock, related stockholder matters, the Company s purchases of equity securities, and the Company s stock-based compensation plans, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. DIVIDEND POLICY Doral Financial has not paid quarterly dividends on its common stock since April 25, 2006, when the Company announced that, as a prudent capital management decision designed to preserve and strengthen the Company s capital, our board of directors had suspended the quarterly dividend on the common stock. Our ability to pay dividends in the future is limited by various regulatory requirements and policies of bank regulatory agencies having jurisdiction over Doral Financial and its banking subsidiaries, its earnings, Table of Contents cash resources and capital needs, general business conditions and other factors deemed relevant by our board of directors. Under an existing consent order with the Federal Reserve, Doral Financial is restricted from paying dividends on its capital stock without the prior written approval of the Federal Reserve. Doral Financial is required to request permission for the payment of dividends on its common stock and preferred stock not less than 30 days prior to a proposed dividend declaration date. For the years ended December 31, 2008 and 2007, Doral Financial received permission from the Federal Reserve to pay all of the regular monthly cash dividends on the noncumulative preferred stock and the quarterly cash dividends on the perpetual convertible preferred stock, but cannot provide assurance that it would receive approval for the payment of such dividends in the future. On March 20, 2009, our board of directors announced that it had suspended the declaration and payment of all dividends on all of Doral Financial s outstanding series of cumulative and noncumulative preferred stock. The suspension of dividends was effective and commenced with the dividends for the month of April 2009 for Doral Financial s three then outstanding series of noncumulative preferred stock, and the dividends for the second quarter of 2009 for Doral Financial s one outstanding series of cumulative preferred stock. We will be unable to pay dividends on the common stock unless and until we resume payments of dividends on our preferred stock. If we do not pay dividends in full on our noncumulative preferred stock for 18 consecutive monthly periods, or pay dividends in full on our perpetual convertible preferred stock for consecutive dividend periods containing in the aggregate a number of days equivalent to six fiscal quarters, the holders of our preferred stock, all acting together as a single class, would have the right to elect two additional members of our board of directors. DESCRIPTION OF OUR CAPITAL STOCK Set forth below is a description of the material terms of our capital stock. However, this description is not complete and is qualified by reference to our certificate of incorporation (including our certificates of designation) and bylaws. Copies of our certificate of incorporation (including our certificates of designation) and bylaws are available from us upon request. These documents have also been filed with the SEC. Please see Where You Can Find More Information in this prospectus. Authorized And Outstanding Capital Stock Our authorized capital stock consists of 300,000,000 shares of common stock, $0.01 par value per share, and 40,000,000 shares of preferred stock, $1.00 par value per share. As of July 28, 2010, there were 107,614,606 shares of common stock outstanding and 5,904,867 shares of preferred stock outstanding, comprised of 950,166 shares of our 7.00% Noncumulative Monthly Income Preferred Stock, Series A, 1,331,694 shares of our 8.35% Noncumulative Monthly Income Preferred Stock, Series B, 2,716,005 shares of our 7.25% Noncumulative Monthly Income Preferred Stock, Series C, 813,526 shares of our 4.75% Perpetual Cumulative Convertible Preferred Stock and 93,476 shares of our Mandatorily Convertible Preferred Stock. Common Stock Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of our common stock are entitled to receive ratably such dividends as may be declared by our board of directors out of funds legally available for dividends. In the event of our liquidation or dissolution, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock. All of the outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable. As of July 28, 2010, there were 107,614,606 shares of common stock outstanding. Table of Contents Preferred Stock As of July 28, 2010, we had 33,730,135 shares of authorized but unissued preferred stock, which are undesignated. Our board of directors has the authority, without further shareholder approval, to issue shares of preferred stock from time to time in one or more series, with such voting powers or without voting powers, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, as will be set forth in the resolutions providing therefor. While providing desirable flexibility for possible acquisitions and other corporate purposes, and eliminating delays associated with a shareholder vote on specific issuances, the issuance of preferred stock could adversely affect the voting power of holders of common stock, as well as dividend and liquidation payments on both common and preferred stock. It also could have the effect of delaying, deferring or preventing a change in control. General Under our certificate of incorporation, our board of directors is authorized, without further stockholder action, to issue up to 40,000,000 shares of preferred stock, $1.00 par value per share, in one or more series, and to determine the designations, preferences, limitations and relative or other rights of the preferred stock or any series thereof. For each series, the board of directors will determine the designations, preferences, limitations and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series: (a) the rate or rates (which may be floating, variable or adjustable), or the method of determining such rate or rates and the times and manner of payment of dividends, if any (and whether such payment should be in cash or securities); (b) whether shares may be redeemed or purchased, in whole or in part, at the option of the holder or the Company and, if so, the price or prices and the terms and conditions of such redemption or purchase; (c) the amount payable upon shares in the event of voluntary or involuntary liquidation, dissolution or other winding up of the Company; (d) sinking fund provisions, if any, for the redemption or purchase of shares; (e) the terms and conditions, if any, on which shares may be converted or exchanged into shares of common stock or other capital stock or securities of the Company; (f) voting rights, if any; and (g) any other rights and preferences of such shares, to the full extent now or hereafter permitted by the laws of the Commonwealth of Puerto Rico. All shares of preferred stock (i) will rank senior to the common stock in respect of the right to receive dividends and the right to receive payments out of the assets of the Company upon voluntary or involuntary liquidation, dissolution or winding up of the Company, (ii) will be of equal rank, regardless of series, and (iii) will be identical in all respects except as provided in (a) through (g) above. The shares of any series of preferred stock will be identical with each other in all respects except as to the dates from and after which dividends thereof will be cumulative. In case the stated dividends or the amounts payable on liquidation are not paid in full, the shares of all series of preferred stock will share ratably in the payment of dividends, including accumulations, if any, in accordance with the sums which would be payable on said shares if all dividends were declared and paid in full, and in any distribution of assets other than by way of dividends in accordance with the sums which would be payable on such distribution if all sums payable were discharged in full. The board of directors will have the authority to determine the number of shares that will comprise each series. Unless otherwise provided in the resolution establishing such series, all shares of preferred stock redeemed, retired by sinking fund payment, repurchased by the Company or converted into common stock will have the status of authorized but unissued shares of preferred stock undesignated as to series. Table of Contents No holder of shares of preferred stock will be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional issue of stock of any class whatsoever, or of securities convertible into any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. Outstanding Preferred Stock On February 22, 1999, the Company issued 1,495,000 shares of its Series A preferred stock at a price of $50.00 per share, its liquidation preference. During 2008, the Company paid dividends of $3.50 per share (an aggregate of $5.2 million). The Series A preferred stock may be redeemed at the option of the Company beginning February 28, 2004, at varying redemption prices that start at $51.00 per share. As of July 28, 2010, there were 950,166 shares of the Series A preferred stock outstanding. On August 31, 2000, the Company issued 2,000,000 shares of its Series B preferred stock at a price of $25.00 per share, its liquidation preference. During 2008, the Company paid dividends of $2.0875 per share (an aggregate of $4.2 million). The 8.35% preferred stock may be redeemed at the option of the Company beginning on September 30, 2005, at varying redemption prices that start at $25.50 per share. As of July 28, 2010, there were 1,331,694 shares of the Series B preferred stock outstanding. During the second quarter of 2002, the Company issued 4,140,000 shares of its Series C preferred stock at a price of $25.00 per share, its liquidation preference. During 2008, the Company paid dividends of $1.8125 per share (an aggregate of $7.5 million). The Series C preferred stock may be redeemed at the option of the Company beginning on May 31, 2007, at varying redemption prices starting at $25.50 per share. As of July 28, 2010, there were 2,716,005 of the Series C preferred stock outstanding. On September 29, 2003 and October 8, 2003, the Company issued 1,200,000 shares and 180,000 shares, respectively, of its perpetual convertible preferred stock having a liquidation preference of $250 per share in a private offering to qualified institutional buyers pursuant to Rule 144A. Each share of perpetual convertible preferred stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific conditions. During 2008, the Company paid dividends of $11.875 per share (an aggregate of $16.4 million), on the perpetual convertible preferred stock. As of July 28, 2010, there were 813,526 shares of the perpetual convertible preferred stock outstanding. On April 21, 2010 and April 22, 2010, the Company issued directly to investors 177,000 shares and 3,000 shares, respectively, of its Mandatorily Convertible Preferred Stock in a private offering to accredited investors pursuant to Regulation D. In addition, on April 21, 2010 and April 22, 2010, the Company issued into escrow 101,260 shares and 3,742 shares, respectively, of its Mandatorily Convertible Preferred Stock. On May 3, 2010, all 105,002 shares of Mandatorily Convertible Preferred Stock were released from escrow to investors. Each share of Mandatorily Convertible Preferred Stock is currently convertible into 210.52631 shares of common stock, subject to standard anti-dilution adjustments. As of the date hereof, there has been no adjustment to the conversion rate. The Mandatorily Convertible Preferred Stock ranks on parity with the Company s Series A preferred stock, Series B preferred stock, Series C preferred stock and perpetual convertible preferred stock, with respect to dividend rights and rights upon liquidation, winding up or dissolution. As of July 28, 2010, there were 93,476 shares of our Mandatorily Convertible Preferred Stock outstanding. The Mandatorily Convertible Preferred Stock of each holder is mandatorily convertible into shares of our common stock at an initial conversion price of $4.75 per share (or up to 60,000,421 shares of common stock), subject to adjustment, following the latest of: (1) the receipt by the Company of stockholder approval (described below); (2) if applicable to the holder s conversion, the expiration or termination of any waiting period under the HSR Act applicable to such holder; and (3) in the case of an investor that is a direct or indirect investor in Doral Holdings, the earlier of (a) the date on which the registration statement of which this prospectus forms a part has been declared effective and (b) October 18, 2010 (the 180th day after the date of first issue of the Mandatorily Convertible Preferred Stock), provided that such investor may delay conversion until after the dissolution of Doral Holdings and Doral Holdings, L.P. However, if a holder owns or would own following conversion, directly or indirectly, in excess of 9.9% of the Company s outstanding voting Table of Contents Exhibit Number Description 4 .1 Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 4 .2 Loan and Guaranty Agreement among Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ( AFICA ), Doral Properties, Inc. and Doral Financial. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .3 Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by reference to exhibit number 4.2 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .4 Form of Serial and Term Bond (included in Exhibit 4.3 hereof). 4 .5 Deed of Constitution of First Mortgage over Doral Financial Plaza. (Incorporated herein by reference to exhibit number 4.4 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .6 Mortgage Note secured by First Mortgage referred to in Exhibit 4.5 hereto (included in Exhibit 4.5 hereof). 4 .7 Pledge and Security Agreement. (Incorporated herein by reference to exhibit number 4.6 of Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 filed with the Commission on November 15, 1999.) 4 .8 Indenture, dated May 14, 1999, between Doral Financial and U.S. Bank National Association, as trustee, pertaining to senior debt securities. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Current Report on Form 8-K filed with the Commission on May 21, 1999.) 4 .9 Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust Company, as trustee, pertaining to subordinated debt securities. (Incorporated herein by reference to exhibit number 4.3 of Doral Financial s Current Report on Form 8-K filed with the Commission on May 21, 1999.) 4 .10 Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred Stock, Series A. (Incorporated herein by reference to exhibit number 4(A) of Doral Financial s Registration Statement on Form S-3 filed with the Commission on October 30, 1998.) 4 .11 Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred Stock, Series B. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Registration Statement on Form 8-A filed with the Commission on August 30, 2000.) 4 .12 First Supplemental Indenture, dated as of March 30, 2001, between Doral Financial and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), as trustee. (Incorporated herein by reference to exhibit number 4.9 to Doral Financial s Current Report on Form 8-K filed with the Commission on April 2, 2001.) 4 .13 Form of Stock Certificate for 7.25% Noncumulative Monthly Income Preferred Stock, Series C. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Registration Statement on Form 8-A filed with the Commission on May 30, 2002.) 4 .14 Form of Stock Certificate for 4.75% Perpetual Cumulative Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 4 to Doral Financial s Current Report on Form 8-K filed with the Commission on September 30, 2003.) 4 .15 Form of Stock Certificate for Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock (included in Exhibit 3.4 hereof). 5 .1 Form of opinion of Enrique R. Ubarri, Esq., Executive Vice President and General Counsel of the Company, regarding the validity of the common stock being registered. Table of Contents Exhibit Number Description 10 .2 Stipulation and Agreement of Partial Settlement, dated as of April 27, 2007. (Incorporated herein by reference to Exhibit 10.1 of Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Commission on April 30, 2007.) 10 .3 Order to Cease and Desist issued to Doral Bank PR by the Federal Deposit Insurance Corporation, dated February 19, 2008. (Incorporated herein by reference to exhibit number 99-2 of Doral Financial s Current Report of Form 8-K filed with the Commission on February 21, 2008.) 10 .4 Purchase Agreement, dated September 23, 2003, between Doral Financial Corporation and Wachovia Securities LLC, as Representative of the Initial Purchasers of Doral Financial s 4.75% Perpetual Cumulative Convertible Preferred Stock named therein. (Incorporated herein by reference to Exhibit 1 to Doral Financial s Current Report on Form 8-K filed with the Commission on September 30, 2003.) 10 .5 Employment Agreement, dated as of May 23, 2006, between Doral Financial and Glen Wakeman. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial s Current Report on Form 8-K filed with the Commission on May 30, 2006.) 10 .6 Employment Agreement, dated as of August 14, 2006, between Doral Financial Corporation and Lesbia Blanco. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.) 10 .7 Employment Agreement, dated as of October 2, 2006, between Doral Financial Corporation and Enrique R. Ubarri, Esq. (Incorporated herein by reference to Exhibit 10.7 to Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.) 10 .8 Employment Agreement, dated as of June 25, 2007, between Doral Financial Corporation and Paul Makowski. (Incorporated herein by reference to Exhibit 10.11 to Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 10 .9 Employment Agreement, dated as of June 1, 2007, between Doral Financial Corporation and Christopher Poulton. (Incorporated herein by reference to Exhibit 10.10 to Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 10 .10 Securityholders and Registration Rights Agreement dated as of July 19, 2007, between Doral Financial Corporation and Doral Holdings Delaware, LLC. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 20, 2007.) 10 .11 Advisory Services Agreements, dated as of July 19, 2007, between Doral Financial Corporation and Bear Stearns Merchant Manager III, L.P. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Commission on July 20, 2007.) 10 .12 Doral Financial 2008 Stock Incentive Plan. (Incorporated herein by reference to Annex A to the Definitive Proxy Statement for the Doral Financial 2008 Annual Stockholders Meeting filed with the Commission on April 11, 2008.) 10 .13 Employment Agreement, dated as of March 24, 2009, between Doral Financial and Robert E. Wahlman. (Incorporated herein by reference to Exhibit 99.2 to Doral Financial s Current Report on Form 8-K filed with the Commission on March 26, 2009.) 10 .14 Summary of Doral Financial Corporation 2007 Key Employee Incentive Plan. (Incorporated by reference to Exhibit 10.15 to Doral Financial s Registration Statement on Form S-4 filed with the Commission on September 29, 2009.) 10 .15 Cooperation Agreement, dated as of April 19, 2010, by and among Doral Financial Corporation, Doral Holdings Delaware, LLC, Doral Holdings, L.P., and Doral GP Ltd. (Incorporated herein by reference to Exhibit 10.15 to Doral Financial s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the Commission on May 10, 2010.) Table of Contents Exhibit Number Description 4 .13 Form of Stock Certificate for 7.25% Noncumulative Monthly Income Preferred Stock, Series C. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial s Registration Statement on Form 8-A filed with the Commission on May 30, 2002.) 4 .14 Form of Stock Certificate for 4.75% Perpetual Cumulative Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 4 to Doral Financial s Current Report on Form 8-K filed with the Commission on September 30, 2003.) 4 .15 Form of Stock Certificate for Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock (included in Exhibit 3.4 hereof). 5 .1 Form of opinion of Enrique R. Ubarri, Esq., Executive Vice President and General Counsel of the Company, regarding the validity of the common stock being registered. 10 .1 Order to Cease and Desist issued to Doral Financial by the Board of Governors of the Federal Reserve System on March 16, 2006. (Incorporated herein by reference to Exhibit 99.2 to Doral Financial s Current Report on Form 8-K filed with the Commission on March 17, 2006.) 10 .2 Stipulation and Agreement of Partial Settlement, dated as of April 27, 2007. (Incorporated herein by reference to Exhibit 10.1 of Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Commission on April 30, 2007.) 10 .3 Order to Cease and Desist issued to Doral Bank PR by the Federal Deposit Insurance Corporation, dated February 19, 2008. (Incorporated herein by reference to exhibit number 99-2 of Doral Financial s Current Report of Form 8-K filed with the Commission on February 21, 2008.) 10 .4 Purchase Agreement, dated September 23, 2003, between Doral Financial Corporation and Wachovia Securities LLC, as Representative of the Initial Purchasers of Doral Financial s 4.75% Perpetual Cumulative Convertible Preferred Stock named therein. (Incorporated herein by reference to Exhibit 1 to Doral Financial s Current Report on Form 8-K filed with the Commission on September 30, 2003.) 10 .5 Employment Agreement, dated as of May 23, 2006, between Doral Financial and Glen Wakeman. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial s Current Report on Form 8-K filed with the Commission on May 30, 2006.) 10 .6 Employment Agreement, dated as of August 14, 2006, between Doral Financial Corporation and Lesbia Blanco. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.) 10 .7 Employment Agreement, dated as of October 2, 2006, between Doral Financial Corporation and Enrique R. Ubarri, Esq. (Incorporated herein by reference to Exhibit 10.7 to Doral Financial s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.) 10 .8 Employment Agreement, dated as of June 25, 2007, between Doral Financial Corporation and Paul Makowski. (Incorporated herein by reference to Exhibit 10.11 to Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 10 .9 Employment Agreement, dated as of June 1, 2007, between Doral Financial Corporation and Christopher Poulton. (Incorporated herein by reference to Exhibit 10.10 to Doral Financial s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008.) 10 .10 Securityholders and Registration Rights Agreement dated as of July 19, 2007, between Doral Financial Corporation and Doral Holdings Delaware, LLC. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 20, 2007.) 10 .11 Advisory Services Agreements, dated as of July 19, 2007, between Doral Financial Corporation and Bear Stearns Merchant Manager III, L.P. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Commission on July 20, 2007.) Table of Contents securities (4.9% for a purchaser that is subject to the Bank Holding Company Act of 1956, as amended), Mandatorily Convertible Preferred Stock owned by such holder will not be converted on the mandatory conversion date to the extent it would exceed this threshold. We agreed in the Stock Purchase Agreement to seek stockholder approval of the issuance of common stock into which the Mandatorily Convertible Preferred Stock is convertible in accordance with the requirements of the NYSE. A special meeting of stockholders was held on June 28, 2010 at which stockholders approved the issuance of up to 60,000,421 shares of our common stock upon conversion of the 285,002 shares of the Mandatorily Convertible Preferred Stock. If stockholder approval had not been given for the conversion by October 18, 2010 (180 days after the date of first issue of the Mandatorily Convertible Preferred Stock), the conversion price would have been reduced by 1.0% every 90 days thereafter until stockholder approval was obtained, subject to a maximum reduction of 10%. Under the Cooperation Agreement, the Holdings Parties agreed that Doral Holdings, our principal shareholder, would vote its shares of common stock in favor of authorizing the issuance of common stock upon the conversion of the Mandatorily Convertible Preferred Stock and against any action that would compete with or impede or interfere with the conversion. Additionally, Doral GP Ltd. agreed to cause the dissolution of each of Doral Holdings and Doral Holdings, L.P. after receipt of the stockholder approval, promptly following the earlier of the effectiveness of this registration statement and October 17, 2010 (the 180th day after the funding date under the Stock Purchase Agreement), and not to transfer any of its shares of common stock or voluntarily dissolve prior to that time. The terms of the Company s preferred stock do not permit the Company to declare, set apart or pay any dividends or make any other distribution of assets, or redeem, purchase, set apart or otherwise acquire shares of the common stock, or any other class of the Company s stock ranking junior to the preferred stock, unless all accrued and unpaid dividends on the preferred stock and any parity stock, at the time those dividends are payable, have been paid and the full dividend on the preferred stock for the current dividend period is contemporaneously declared and paid or set aside for payment. The terms of the preferred stock provide that if the Company is unable to pay in full dividends on the preferred stock and other shares of stock of equal rank as to the payment of dividends, all dividends declared upon the preferred stock and such other shares of stock be declared pro rata. On March 20, 2009, our board of directors announced that it had suspended the declaration and payment of all dividends on all of the Company s outstanding series of cumulative and noncumulative preferred stock. The suspension of dividends was effective and commenced with the dividends for the month of April 2009 for the Company s three then outstanding series of noncumulative preferred stock, and the dividends for the second quarter of 2009 for the Company s one outstanding series of cumulative preferred stock (See Dividend Policy in this prospectus). The ability of the Company to pay dividends in the future is limited by the consent order entered into with the Federal Reserve and by various restrictive covenants contained in the debt agreements of the Company, the earnings, cash position and capital needs of the Company, general business conditions and other factors deemed relevant by the Company s board of directors. Current regulations limit the amount in dividends that Doral Bank PR and Doral Bank NY may pay. Payment of such dividends is prohibited if, among other things, the effect of such payment would cause the capital of Doral Bank PR or Doral Bank NY to fall below the regulatory capital requirements. The Federal Reserve Board has issued a policy statement that provides that insured banks and financial holding companies should generally pay dividends only out of current operating earnings. In addition, the Company s consent order with the Federal Reserve does not permit the Company to receive dividends from Doral Bank PR unless the payment of such dividends has been approved by the FDIC. Dividends paid from a U.S. subsidiary to certain qualifying corporations such as the Company are generally subject to a 10% withholding tax under the provisions of the U.S. Internal Revenue Code. Stockholder Action Except as otherwise provided by law or in our certificate of incorporation or bylaws, all questions submitted to stockholders will be decided by a majority of the votes cast. Table of Contents Transfer Agent And Registrar Mellon Investor Services LLC is the transfer agent and registrar for our common stock, our four outstanding series of noncumulative preferred stock and our perpetual convertible preferred stock. Anti-Takeover Provisions Our certificate of incorporation, bylaws and banking laws include a number of provisions which may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include an authorized blank check preferred stock and the availability of authorized but unissued common stock. Regulatory Restrictions under Banking Laws The regulatory restrictions described in the Business Regulation and Supervision section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which is incorporated by reference herein, may have the effect of discouraging takeover attempts against the Company and may limit the ability of persons, other than the Company directors duly authorized by the Company s board of directors, to solicit or exercise proxies, or otherwise exercise voting rights, in connection with matters submitted to a vote of the Company s stockholders. Table of Contents SELLING STOCKHOLDERS This prospectus covers 91,986,097 shares of our common stock that the selling stockholders may offer for resale from time to time and includes 58,500,386 shares of our common stock to be issued by us upon conversion of 277,877 shares of Mandatorily Convertible Preferred Stock and 33,485,711 shares of our common stock currently held by Doral Holdings, which will be distributed to the direct and indirect investors in Doral Holdings, L.P. in connection with the dissolution of Doral Holdings and Doral Holdings, L.P. (the Doral Holdings Shares ). As of July 28, 2010, 191,526 shares of Mandatorily Convertible Preferred Stock had been converted into 40,321,236 shares of common stock. The shares of Mandatorily Convertible Preferred Stock were issued on April 21, 2010 and April 22, 2010 in a private placement at a purchase price of $1,000 per share pursuant to the Stock Purchase Agreement. The Doral Holdings Shares were issued and sold to Doral Holdings in a private sale on July 19, 2007 for an aggregate purchase price of $610 million, or approximately $12.60 per share. In the Stock Purchase Agreement and Cooperation Agreement, we agreed to file a registration statement covering the resale of common stock, including common stock into which the Mandatorily Convertible Preferred Stock is convertible and the Doral Holdings Shares. We are registering the securities on a registration statement on Form S-1, of which this prospectus forms a part. The securities are being registered to permit public secondary trading of the securities, and the selling stockholders may offer the securities for resale from time to time after the effective date of the registration statement. The table below reads as follows: The first column lists the selling stockholders and other information regarding the stock ownership of each of the selling stockholders. The second column lists the number of shares of Mandatorily Convertible Preferred Stock owned by each selling stockholder prior to conversion into common stock. The third column lists the number of shares of common stock issued or to be issued to each selling stockholder upon conversion of the Mandatorily Convertible Preferred Stock (assuming the conversion of all shares of the Mandatorily Convertible Preferred Stock). The fourth column lists the number of shares of common stock to be distributed by Doral Holdings to each selling stockholder in connection with the dissolution of Doral Holdings and Doral Holdings, L.P. The fifth column lists the number of shares of common stock owned by each selling stockholder as of July 28, 2010, and includes (i) the shares of common stock to be issued to the selling stockholder upon conversion of the Mandatorily Convertible Preferred Stock (assuming the conversion of all shares of the Mandatorily Convertible Preferred Stock), (ii) the shares of common stock to be distributed by Doral Holdings to the selling stockholder in connection with the dissolution of Doral Holdings and Doral Holdings, L.P., and (iii) any other shares of Doral Financial Corporation common stock held by the selling stockholder (none of which are being offered by this prospectus). The sixth column lists the shares of common stock being offered under this prospectus by each of the selling stockholders and assumes the conversion of all shares of the Mandatorily Convertible Preferred Stock and the dissolution of Doral Holdings. The seventh column lists the shares of common stock owned following the offering pursuant to this prospectus and assumes the selling stockholders sell all the common stock offered by this prospectus. The eighth column indicates the percentage of common stock to be owned by each selling stockholder after completion of the offering pursuant to this prospectus based on the number of shares of common stock outstanding as of July 28, 2010 plus 19,679,157 shares of common stock (the maximum number of shares to be issued upon conversion of the remaining 93,476 shares of Mandatorily Convertible Preferred Stock). The amounts set forth below are based upon information provided to us by representatives of the selling stockholders, or on our records, and are accurate to the best of our knowledge as of the date specified below. It is possible, however, that the selling stockholders may acquire or dispose of additional shares of common Table of Contents stock from time to time after the date of this prospectus. We cannot assure you that the selling stockholders will sell all or any portion of the securities offered hereby. Irving Place Capital, Perry Capital, LLC, Marathon Special Opportunity Master Fund, Ltd., Tennenbaum Capital Partners, LLC and D. E. Shaw Co., L.P. each serve as one of the five designating members of Doral GP Ltd., which is the general partner of Doral Holdings, L.P., which is the managing member of Doral Holdings, our principal shareholder. Each entity (or affiliates of each entity) will receive shares of our common stock upon the dissolution of Doral Holdings and Doral Holdings, L.P. and Marathon Special Opportunity Master Fund, Ltd., Tennenbaum Capital Partners, LLC and affiliates of Perry Capital, LLC participated in the private placement. David E. King, Mark I. Kleinman and Howard M. Levkowitz are each members of our board of directors and senior managing directors of Irving Place Capital, Marathon Asset Management L.P. and Tennenbaum Capital Partners, LLC, respectively. None of Mr. King, Mr. Kleinman or Mr. Levkowitz has voting or dispositive power over the applicable shares of preferred or common stock and each disclaims beneficial ownership of such shares. Additionally, an employee of an affiliate of Perry Capital, LLC has in the past served as a member of our board of directors. Irving Place Capital also provides various advisory services to the Company under an advisory services agreement, for which Irving Place Capital is compensated. Lesbia Blanco, Douglas L. Jacobs, Christopher C. Poulton, Robert E. Wahlman and Glen R. Wakeman are each one of our executive officers and/or a member of our board of directors. No other selling stockholder has, or within the past three years has had, any position, office, or other material relationship with us. The majority of the shares of common stock to be issued upon the conversion of the Mandatorily Convertible Preferred Stock will be issued to existing stockholders or to stockholders whose investments are under common control or management with existing stockholders. Shares of Shares of Shares of Common Mandatorily Common Stock to be Total of Shares of Convertible Stock Distributed to All Shares of Common Stock Shares of Percentage Preferred Stock Owned Holder Upon Common Stock Offered Common of Common Owned Prior to Upon Dissolution of Owned by by this Stock Owned Stock Owned Name of Selling Stockholder Conversion Conversion(1) Doral Holdings(1) Holder(1) Prospectus(1) Post-Offering(2) Post-Offering(3) Alden Global Distressed Opportunities Master Fund, L.P. 4,750 1,000,000 0 1,000,000 1,000,000 0 * Anchorage Capital Master Offshore, Ltd. 23,750 5,000,000 1,454,294 6,454,294 6,454,294 0 * Ari Capital Partners, L.L.L.P. 226 47,578 306,167 353,745 353,745 0 * Bay Pond Investors (Bermuda) L.P.(5) 3,977 837,263 0 837,263 837,263 0 * Bay Pond Partners, L.P.(5) 6,710 1,412,631 0 1,412,631 1,412,631 0 * Berggruen Holdings Ltd.(6) 6,413 1,350,105 1,530,836 2,880,941 2,880,941 0 * Canyon Balanced Master Fund, Ltd. (4)(7) 1,506 317,052 306,167 623,219 623,219 0 * Canyon-GRF Master Fund, L.P.(4)(7) 1,449 305,052 0 305,052 305,052 0 * Canyon Value Realization Fund, L.P. (4)(7) 3,577 753,052 727,147 1,480,199 1,480,199 0 * Capital Ventures International(4)(8) 2,375 500,000 0 500,000 500,000 0 * Christopher C. Poulton 48 10,105 0 11,605 10,105 1,500 * Citadel Equity Fund Ltd.(4)(9) 9,500 2,000,000 0 2,000,000 2,000,000 0 * Deferred Compensation Plan for Employees of the City of New York and Related Agencies and Instrumentalities (Nominee: MAC Co.)(10) 390 82,105 0 82,105 82,105 0 * D. E. Shaw Laminar Acquisition Holdings 2, L.L.C. and certain affiliates(4)(11) 0 0 4,454,733 4,530,815 4,454,733 76,082 * Douglas L. Jacobs 0 0 3,936 3,936 3,936 0 * Eton Park Fund, L.P. (12) 7,676 1,616,000 1,339,482 2,955,482 2,955,482 0 * Eton Park Master Fund, Ltd. (12) 14,256 3,001,263 2,487,609 5,488,872 5,488,872 0 * Financial Stocks Capital Partners V L.P.(13) 8,550 1,800,000 0 1,800,000 1,800,000 0 * Finvest Capital Limited(4)(7) 0 0 1,569,107 1,569,107 1,569,107 0 * First Opportunity Fund, Inc. (Nominee: Hare Co.)(14) 925 194,736 0 194,736 194,736 0 * Table of Contents Shares of Shares of Shares of Common Mandatorily Common Stock to be Total of Shares of Convertible Stock Distributed to All Shares of Common Stock Shares of Percentage Preferred Stock Owned Holder Upon Common Stock Offered Common of Common Owned Prior to Upon Dissolution of Owned by by this Stock Owned Stock Owned Name of Selling Stockholder Conversion Conversion(1) Doral Holdings(1) Holder(1) Prospectus(1) Post-Offering(2) Post-Offering(3) FSI Skyline Fund OC, Ltd.(13) 950 200,000 0 200,000 200,000 0 * Future Fund Board of Guardians(15) 1,103 232,210 0 232,210 232,210 0 * Glen R. Wakeman 48 10,105 306,167 349,401 316,272 33,129 * GLG North American Opportunity Fund(16) 2,375 500,000 0 500,000 500,000 0 * GN3 SIP Ltd. 1,306 274,947 0 274,947 274,947 0 * GoldenTree Master Fund, Ltd. 7,173 1,510,105 0 1,510,105 1,510,105 0 * GoldenTree Master Fund II, Ltd. 1,021 214,947 0 214,947 214,947 0 * Goldman Sachs Investment Partners Master Fund, L.P. (4)(17) 7,125 1,500,000 3,061,673 4,561,673 4,561,673 0 * Gordel Holdings Limited(18) 202 42,526 0 42,526 42,526 0 * IAM Mini-Fund 21 Limited(19) 464 97,684 0 97,684 97,684 0 * Interfund SICAV: Sub-fund Interfund Equity USA(20) 2,375 500,000 0 500,000 500,000 0 * IPC Advisors III, L.P. 0 0 76,541 76,541 76,541 0 * Irving Place Capital III Feeder Fund, L.P. 0 0 42,622 42,622 42,622 0 * Irving Place Capital Partners III (Cayman), L.P. 0 0 1,817,461 1,817,461 1,817,461 0 * Ithan Creek Master Investment Partnership (Cayman) II, L.P.(5) 497 104,631 0 104,631 104,631 0 * Ithan Creek Master Investors (Cayman) L.P.(5) 4,887 1,028,842 0 1,028,842 1,028,842 0 * James D. Marver 48 10,105 11,807 21,912 21,912 0 * Jefferies Dakota Master Fund, Ltd.(4)(21) 4,899 1,031,368 0 1,031,368 1,031,368 0 * John Hancock Bank and Thrift Opportunities Fund(22) 2,896 609,684 0 609,684 609,684 0 * John Hancock Financial Industries Fund(22) 2,461 518,105 0 518,105 518,105 0 * John Hancock Regional Bank Fund(22) 5,544 1,167,157 0 1,167,157 1,167,157 0 * Juggernaut Fund, L.P. 10,688 2,250,105 0 2,250,105 2,250,105 0 * LaM Financial Holdings, Ltd, L.L.L.P. 226 47,578 321,910 369,488 369,488 0 * Leo R. Jalenak, Jr. 90 18,947 0 18,947 18,947 0 * Lerner Enterprises, LLC(15) 142 29,894 0 29,894 29,894 0 * Lesbia Blanco 48 10,105 0 11,559 10,105 1,454 * LICR Fund, Inc. (Nominee: MAC Co.)(10) 54 11,368 0 11,368 11,368 0 * Lion De Leeuw Investments, LLC 48 10,105 1,968 12,073 12,073 0 * LMA SPC for and on behalf of MAP 69 Segregated Portfolio(23) 9,351 1,968,631 0 1,968,631 1,968,631 0 * MACVest 1, Ltd.(4)(7) 0 0 76,542 76,542 76,542 0 * Malta Hedge Fund, L.P. (Sandler O Neil Asset Management, LLC)(24) 537 113,052 0 116,252 113,052 3,200 * Malta Hedge Fund II, L.P. (Sandler O Neil Asset Management, LLC)(24) 3,081 648,631 0 667,231 648,631 18,600 * Malta MLC Fund, L.P. (Sandler O Neil Asset Management, LLC)(24) 1,579 332,421 0 345,921 332,421 13,500 * Malta MLC Offshore, Ltd. (Sandler O Neil Asset Management, LLC)(24) 356 74,947 0 78,047 74,947 3,100 * Malta Offshore, Ltd. (Sandler O Neil Asset Management, LLC)(24) 1,064 224,000 0 230,300 224,000 6,300 * Malta Partners, L.P. (Sandler O Neil Asset Management, LLC)(24) 152 32,000 0 32,900 32,000 900 * Malta Titan Fund, L.P. (Sandler O Neil Asset Management, LLC)(24) 3,919 825,052 0 871,952 825,052 46,900 * Marathon Special Opportunity Master Fund, Ltd. 15,675 3,300,000 4,539,991 7,839,991 7,839,991 0 * Table of Contents Shares of Shares of Shares of Common Mandatorily Common Stock to be Total of Shares of Convertible Stock Distributed to All Shares of Common Stock Shares of Percentage Preferred Stock Owned Holder Upon Common Stock Offered Common of Common Owned Prior to Upon Dissolution of Owned by by this Stock Owned Stock Owned Name of Selling Stockholder Conversion Conversion(1) Doral Holdings(1) Holder(1) Prospectus(1) Post-Offering(2) Post-Offering(3) Mariner-Tricadia Credit Strategies Master Fund, Ltd.(25) 1,663 350,105 0 350,105 350,105 0 * MassMutual Select Small Cap Growth Equity Fund (Nominee: Aurora Co.)(26) 202 42,526 0 42,526 42,526 0 * MML Small Cap Growth Equity Fund (Nominee: Aurora Co.)(26) 130 27,368 0 27,368 27,368 0 * Nomura Waterstone Market Neutral Fund(19) 106 22,315 0 22,315 22,315 0 * Oak Hill Credit Opportunities Financing, Ltd.(15) 2,107 443,578 0 443,578 443,578 0 * O Connor Global Multi-Strategy Alpha Master Limited(27) 2,375 500,000 0 500,000 500,000 0 * OHA Strategic Credit Master Fund, L.P.(15) 2,258 475,368 0 475,368 475,368 0 * OHA Strategic Credit Master Fund II, L.P.(15) 633 133,263 0 133,263 133,263 0 * OHSF Financing, Ltd.(15) 3,257 685,684 0 685,684 685,684 0 * OZ Global Special Investments Master Fund, LP(28) 326 68,631 0 68,631 68,631 0 * OZ Master Fund, Ltd.(29) 6,492 1,366,736 0 1,366,736 1,366,736 0 * OZ Select Master Fund, Ltd.(30) 105 22,105 0 22,105 22,105 0 * Perry Partners International, Inc. 5,321 1,120,210 3,316,763 4,524,498 4,436,973 87,525 * Perry Partners LP 1,804 379,789 1,099,699 1,516,963 1,479,488 37,475 * PM Manager Fund, SPC., on behalf of and for the account of Segregated Portfolio 23(13) 2,375 500,000 0 500,000 500,000 0 * Prime Capital Master SPC, GOT WAT MAC Segregated Portfolio(19) 320 67,368 0 67,368 67,368 0 * Public Employees Retirement System of Mississippi (Nominee: MAC Co.)(10) 532 112,000 0 112,000 112,000 0 * Quintessence Fund L.P.(31) 234 49,263 0 49,263 49,263 0 * QVT Fund LP(31) 2,141 450,736 0 450,736 450,736 0 * Randall C. Bassett 5 1,052 1,914 2,966 2,966 0 * Randolph Street Ventures, L.P. 2006-3B 0 0 73,692 73,692 73,692 0 * Randolph Street Ventures, L.P. 2006-3C 22 4,631 0 4,631 4,631 0 * Robert E. Wahlman 238 50,105 0 50,105 50,105 0 * Samlyn Offshore Master Fund, Ltd. 6,778 1,426,947 0 1,426,947 1,426,947 0 * Samlyn Onshore Fund, LP 7,472 1,573,052 0 1,573,052 1,573,052 0 * Scott R. Royster 24 5,052 13,558 18,610 18,610 0 * Senvest Master Fund LP 7,125 1,500,000 0 2,203,102 1,500,000 703,102 * SOAM Capital Partners, L.P. (Sandler O Neil Asset Management, LLC)(24) 2,375 500,000 0 500,000 500,000 0 * Special Value Continuation Partners, LP 1,070 225,263 852,532 1,077,795 1,077,795 0 * Special Value Expansion Fund, LLC 399 84,000 317,799 401,799 401,799 0 * Special Value Opportunities Fund, LLC 1,837 386,736 1,462,862 1,849,598 1,849,598 0 * Stan Makson 11 2,315 0 2,315 2,315 0 * Structured Credit Opportunities Fund II, L.P.(25) 712 149,894 0 149,894 149,894 0 * Tennenbaum Opportunities Partners V, LP 2,394 504,000 1,906,796 2,410,796 2,410,796 0 * The Canyon Value Realization Master Fund, L.P. 7,718 1,624,842 0 1,624,842 1,624,842 0 * Timothy R. Chrisman 48 10,105 3,936 14,041 14,041 0 * Vanguard Explorer Fund (Nominee: Vanguard Explorer Fund c/o Brown Brothers Harriman Co.)(32) 2,872 604,631 0 604,631 604,631 0 * Waterstone Market Neutral Mac51, Ltd.(19) 1,345 283,157 0 283,157 283,157 0 * Table of Contents Shares of Shares of Shares of Common Mandatorily Common Stock to be Total of Shares of Convertible Stock Distributed to All Shares of Common Stock Shares of Percentage Preferred Stock Owned Holder Upon Common Stock Offered Common of Common Owned Prior to Upon Dissolution of Owned by by this Stock Owned Stock Owned Name of Selling Stockholder Conversion Conversion(1) Doral Holdings(1) Holder(1) Prospectus(1) Post-Offering(2) Post-Offering(3) Waterstone Market Neutral Master Fund, Ltd.(19) 10,271 2,162,315 0 2,162,315 2,162,315 0 * Waterstone MF Fund, Ltd.(19) 1,744 367,157 0 367,157 367,157 0 * Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Active Small Cap Stock Portfolio (Nominee: Finwell Co.)(33) 574 120,842 0 120,842 120,842 0 * Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Multi-Strategy Global Equity Portfolio (Nominee: Finwell Co.)(33) 28 5,894 0 5,994 5,894 100 * Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Small Cap Opportunities Portfolio (Nominee: Finwell Co.)(33) 406 85,473 0 85,473 85,473 0 * Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Small Cap Opportunities Portfolio (Nominee: Finwell Co.)(33) 217 45,684 0 45,684 45,684 0 * Wolf Creek Investors (Bermuda) L.P.(5) 1,349 284,000 0 284,000 284,000 0 * * Represents less than 1%. Represents selling stockholder whose shares of Mandatorily Convertible Preferred Stock have not, as of July 28, 2010, been converted into common stock. (1) Assumes the conversion of all shares of the Mandatorily Convertible Preferred Stock and the dissolution of Doral Holdings. (2) Assumes that each selling stockholder will sell all shares offered by it under this prospectus. Any values contained in this column represent shares owned by the selling stockholder that are not being offered pursuant to this prospectus. (3) This number represents the percentage of common stock to be owned by the selling stockholder after completion of the offering pursuant to this prospectus and based on the number of shares of common stock outstanding as of July 28, 2010 plus 19,679,157 shares of common stock (the maximum number of shares to be issued upon conversion of the remaining 93,476 shares of Mandatorily Convertible Preferred Stock). See the corresponding number of shares in the column titled Shares of Common Stock Owned Post-Offering. (4) This selling stockholder is a registered broker-dealer or affiliate of a registered broker-dealer, as indicated below. (5) (i) Bay Pond Investors (Bermuda) L.P., (ii) Bay Pond Partners, L.P., (iii) Ithan Creek Master Investment Partnership (Cayman) II, L.P., (iv) Ithan Creek Master Investors (Cayman) L.P. and (v) Wolf Creek Investors (Bermuda) L.P. are managed by Wellington Management Company, LLP ( Wellington ), an investment adviser registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. (6) All of the shares of Berggruen Holdings Ltd. ( Berggruen Holdings ) are owned by Tarragona Trust, a British Virgin Islands trust ( Tarragona ). The trustee of Tarragona is Maitland Trustees Limited, a British Virgin Islands corporation acting as an institutional trustee in the ordinary course of business without the purpose or effect of changing or influencing control of the registrant. Nicolas Berggruen is a director of Berggruen Holdings and may be considered to have beneficial ownership of Berggruen Holdings interests in the registrant. Table of Contents (7) Canyon Capital Advisors LLC ( Canyon Capital ) is the investment advisor of, or managing member of the general partner of, each of Canyon Balanced Master Fund, Ltd. ( CBF ), Canyon-GRF Master Fund, L.P. ( GRF ), Canyon Value Realization Fund, L.P. ( CVRF ), FinVest Capital Limited ( FinVest ) and MACVest, 1, Ltd. ( MACVest ), and as such, each of Canyon Capital and Canpartners Investments III, LLC, the general partner of CVRF, may be deemed to have indirect beneficial ownership of the shares held by CBF, GRF, CVRF, FinVest and MACVest. Finvest Capital Limited is a subsidiary of The Canyon Value Realization Master Fund, L.P., which in turn is a subsidiary of The Canyon Value Realization Fund (Cayman), Ltd. Canyon Capital is an affiliate of Coldwater Securities Incorporated., a broker-dealer. (8) Heights Capital Management, Inc., the authorized agent of Capital Ventures International ( CVI ), has discretionary authority to vote and dispose of the shares held by CVI and may be deemed to be the beneficial owner of these shares. CVI is affiliated with one or more registered broker-dealers. CVI purchased the shares being registered hereunder in the ordinary course of business and at the time of purchase, had no agreements or understandings, directly or indirectly, with any other person to distribute such shares. (9) Citadel Equity Fund Ltd. is the non-managing member of Palafox Trading LLC, a registered broker-dealer and a member of Financial Industry Regulatory Authority, Inc. ( FINRA ). (10) (i) Deferred Compensation Plan for Employees of the City of New York and Related Agencies and Instrumentalities, (ii) LICR Fund, Inc. and (iii) Public Employees Retirement System of Mississippi, through its nominee, MAC Co., are managed by Wellington, an investment advisor registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. (11) D. E. Shaw Laminar Acquisition Holdings 2, L.L.C. ( Laminar ) is an affiliate of D. E. Shaw Securities, L.L.C, a registered broker-dealer and a member of FINRA. Laminar holds 4,454,733 shares (the Laminar Shares ) of the Company s common stock. D. E. Shaw Valence Portfolios, L.L.C. ( Valence ) and D. E. Shaw Synoptic Portfolios 2, L.L.C. ( Synoptic ), affiliates of Laminar, hold 76,030 shares (the Valence Shares ) of the Company s common stock and 52 shares (the Synoptic Shares ; together with the Laminar Shares and the Valence Shares, the Subject Shares ) of the Company s common stock, respectively, acquired through other transactions. The additional 76,082 shares of the Company s common stock are included in the table of selling stockholders above. Laminar has the power to vote or to direct the vote of (and the power to dispose or direct the disposition of) the Laminar Shares. Valence has the power to vote or to direct the vote of (and the power to dispose or direct the disposition of) the Valence Shares. Synoptic has the power to vote or to direct the vote of (and the power to dispose or direct the disposition of) the Synoptic Shares. D. E. Shaw Co., L.P., a Delaware limited partnership ( DESCO LP ), as investment adviser to Laminar, Valence, and Synoptic and as Valence s managing member, may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. D. E. Shaw Laminar Portfolios, L.L.C., a Delaware limited liability company ( Laminar Portfolios ), as Laminar s managing member, may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Laminar Shares. D. E. Shaw Co., L.L.C., a Delaware limited liability company ( DESCO LLC ), as Laminar Portfolios s and Synoptic s managing member, may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Laminar Shares and the Synoptic Shares. As managing member of DESCO LLC, D. E. Shaw Co. II, Inc., a Delaware corporation ( DESCO II, Inc. ) may be deemed to have the shared power to vote or to direct the vote of (and the shared power to dispose or direct the disposition of) the Laminar Shares and the Synoptic Shares. As general partner of DESCO LP, D. E. Shaw Co., Inc., a Delaware corporation ( DESCO, Inc. ), may be deemed to have the shared power to vote or to direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. None of DESCO LP, Laminar Portfolios, DESCO LLC, DESCO, Inc., or DESCO II, Inc., owns any shares of the Company s common stock directly, and each such entity disclaims beneficial ownership of the Subject Shares. David E. Shaw does not own any shares of the Company s common stock directly. By virtue of David E. Shaw s position as president and sole shareholder of DESCO, Inc., which is the general partner of DESCO LP, and by virtue of David E. Shaw s position as president and sole shareholder of DESCO II, Inc., which is the managing member of Table of Contents DESCO LLC, David E. Shaw may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares, and, therefore, David E. Shaw may be deemed to be the indirect beneficial owner of the Subject Shares. David E. Shaw disclaims beneficial ownership of the Subject Shares. (12) Eton Park Capital Management, L.P. is the investment manager of (i) Eton Park Fund, L.P. and (ii) Eton Park Master Fund, Ltd. and exercises voting and dispositive power over the shares being registered. (13) Affiliates of (i) Financial Stocks Capital Partners V L.P., (ii) FSI Skyline Fund OC, Ltd. and (iii) the subadviser to PM Manager Fund, SPC., on behalf of and for the account of Segregated Portfolio 23, hold 300,000 shares of the Company s common stock acquired through other transactions. The additional 300,000 shares of the Company s common stock are not included in the table of selling stockholders above. (14) First Opportunity Fund, Inc., through its nominee, Hare Co., is managed by Wellington, an investment advisor registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. (15) Oak Hill Advisors, L.P. ( OHA ) is the investment advisor to Future Fund Board of Guardians, Lerner Enterprises, LLC, Oak Hill Credit Opportunities Financing, Ltd., OHA Strategic Credit Master Fund, L.P., OHA Strategic Credit Master Fund II, L.P. and OHSF Financing, Ltd. and it and certain of its principals, either directly or indirectly, exercise voting and dispositive power over the shares being registered. OHA and its principals disclaim beneficial ownership of the shares being registered, except to the extent of their direct pecuniary interest therein. (16) GLG Partners LP ( GLG Partners ), which serves as the investment manager to GLG North American Opportunity Fund ( GLG NAOF ), may be deemed to be the beneficial owner of all shares owned by GLG NAOF. GLG Partners exercises its investment authority directly or indirectly through various entities, including without limitation, GLG Inc. GLG Partners Limited ( GLG Limited ), as general partner to GLG Partners, may be deemed to be the beneficial owner of all shares owned by GLG NAOF. Each of Noam Gottesman, Emmanuel Roman, and Pierre Lagrange are Managing Directors of GLG Limited. GLG Partners, Inc., which indirectly wholly owns GLG Limited, may be deemed to be the beneficial owner of all shares owned by GLG NAOF. Each of GLG Partners, GLG Limited, GLG Partners, Inc., GLG Inc., and Messrs. Gottesman, Roman, and Lagrange hereby disclaims any beneficial ownership of any such shares, except for their pecuniary interest therein. (17) Goldman Sachs Investment Partners Master Fund, L.P. is an affiliate of Goldman, Sachs Co., a registered broker-dealer and a member of FINRA. We have been advised that the information reported by Goldman Sachs Investment Partners Master Fund, L.P. reflects the securities beneficially owned by certain operating units (collectively, the Goldman Sachs Reporting Units ) of The Goldman Sachs Group, Inc. and its subsidiaries and affiliates (collectively, GSG ) and does not reflect securities, if any, beneficially owned by any operating units of GSG whose ownership of securities is disaggregated from that of the Goldman Sachs Reporting Units in accordance with the Securities and Exchange Commission Release No. 34-39538 (January 12, 1998). The Goldman Sachs Reporting Units disclaim beneficial ownership of the securities beneficially owned by (i) any client accounts with respect o which the Goldman Sachs Reporting Units or their employees have voting or investment discretion, or both and (ii) certain investment entities of which the Goldman Sachs Reporting Units act as the general partner, managing general partner or other manager, to the extent interests in such entities are held by persons other than the Goldman Sachs Reporting Units. (18) Daniel S. Och, as Chief Executive Officer of Och-Ziff Capital Management Group LLC, the sole shareholder of Och-Ziff Holding Corporation, the General Partner of OZ Management LP, the Investment Manager to Gordel Holdings Limited, may be deemed to have voting and/or investment control of the securities held by Gordel Holdings Limited. Mr. Och disclaims beneficial ownership of the shares, except to the extent of their direct pecuniary interest therein. (19) Waterstone Capital Management, L.P. (or an affiliate) is the investment manager of (i) Waterstone Market Neutral Master Fund, Ltd., (ii) Waterstone Market Neutral Mac51, Ltd., (iii) Waterstone MF Fund, Ltd., (iv) IAM Mini-Fund 21 Limited, (v) Prime Capital Master SPC, GOT WAT MAC Segregated Portfolio Table of Contents and (vi) Nomura Waterstone Market Neutral Fund and exercises voting and dispositive power over the shares being registered. (20) GLG Partners, which serves as the investment manager to Interfund SICAV: Sub-fund Interfund Equity USA ( Interfund SICAV ), may be deemed to be the beneficial owner of all shares owned by Interfund SICAV. GLG Partners exercises its investment authority directly or indirectly through various entities, including without limitation, GLG Limited, as general partner to GLG Partners, may be deemed to be the beneficial owner of all shares owned by Interfund SICAV. Each of Noam Gottesman, Emmanuel Roman, and Pierre Lagrange are Managing Directors of GLG Limited. GLG Partners, Inc., which indirectly wholly owns GLG Limited, may be deemed to be the beneficial owner of all shares owned by Interfund SICAV. Each of GLG Partners, GLG Limited, GLG Partners, Inc., GLG Inc., and Messrs. Gottesman, Roman, and Lagrange hereby disclaims any beneficial ownership of any such shares, except for their pecuniary interest therein. (21) Jefferies Dakota Master Fund, Ltd., a Cayman Islands exempted company (the Dakota Fund ), is a private investment fund. The Dakota Fund s investment adviser, Jefferies Asset Management, LLC ( JAM ) is under the control of Jefferies Group, Inc. ( Group ). Group also controls Jefferies Company, Inc. ( Jefferies ), a registered broker-dealer and a member of FINRA. A majority of the Dakota Fund s feeder funds interests are owned by entities also under the common control of Group and employees of JAM, but the Dakota Fund s board of directors is independent from both JAM and Jefferies. Jefferies is not involved with (i) the day to day operations of the Dakota Fund or JAM, (ii) the investment strategies of the Dakota Fund, (iii) the operations of the Dakota Fund s feeder funds, (iv) or the Dakota Fund s board of directors. Further, other than the securities offered by the Dakota Fund under this prospectus, the securities were purchased by the Dakota Fund through an unaffiliated broker-dealer. Any sales of the securities by the Dakota Fund are expected to be through an unaffiliated broker-dealer. The Dakota fund acquired the securities as investments in the ordinary course of business. (22) (i) John Hancock Bank and Thrift Opportunities Fund, (ii) John Hancock Financial Industries Fund and (iii) John Hancock Regional Bank Fund, are managed by MFC Global Investment Management (US) LLC, which has investment power over the shares being registered. (23) Pursuant to an investment advisory agreement with JAM, JAM is responsible for the investment management of, and all trading decisions for the selling stockholder account including voting and selling power of the shares being registered. (24) Sandler O Neil Asset Management, LLC is the investment manager of (i) Malta Hedge Fund, L.P., (ii) Malta Hedge Fund II, L.P., (iii) Malta MLC Fund, L.P., (iv) Malta MLC Offshore, Ltd., (v) Malta Offshore, Ltd., (vi) Malta Partners, L.P., (vii) Malta Titan Fund, L.P. and (viii) SOAM Capital Partners, L.P. and exercises voting and dispositive power over the shares being registered. (25) Tricadia Capital Management, LLC is the investment manager of (i) Mariner-Tricadia Credit Strategies Master Fund, Ltd. and (ii) Structured Credit Opportunities Fund II, L.P. and exercises voting and dispositive power over the shares being registered. (26) (i) MassMutual Select Small Cap Growth Equity Fund and (ii) MML Small Cap Growth Equity Fund, through its nominee, Aurora Co., are managed by Wellington, an investment advisor registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. (27) UBS O Connor LLC is the investment manager of O Connor Global Multi-Strategy Alpha Master Limited and exercises voting and dispositive power over the O Connor Global Multi-Strategy Alpha Master Limited s shares being registered. (28) Daniel S. Och, as Chief Executive Officer of Och-Ziff Capital Management Group LLC, the sole shareholder of Och-Ziff Holding LLC, the General Partner of OZ Advisors II LP, the General Partner of OZ Global Special Investments Master Fund, LP, may be deemed to have voting and/or investment control of the securities held by OZ Global Special Investments Master Fund, LP. Mr. Och disclaims beneficial ownership of the shares, except to the extent of their direct pecuniary interest therein. Table of Contents (29) Daniel S. Och, as Chief Executive Officer of Och-Ziff Capital Management Group LLC, the sole shareholder of Och-Ziff Holding Corporation, the General Partner of OZ Management LP, the Investment Manager to OZ Master Fund, Ltd., may be deemed to have voting and/or investment control of the securities held by OZ Master Fund, Ltd. Mr. Och disclaims beneficial ownership of the shares, except to the extent of their direct pecuniary interest therein. (30) Daniel S. Och, as Chief Executive Officer of Och-Ziff Capital Management Group LLC, the sole shareholder of Och-Ziff Holding Corporation, the General Partner of OZ Management LP, the Investment Manager to OZ Select Master Fund, Ltd., may be deemed to have voting and/or investment control of the securities held by OZ Master Fund, Ltd. Mr. Och disclaims beneficial ownership of the shares, except to the extent of their direct pecuniary interest therein. (31) QVT Financial LP is the investment manager for QVT Fund LP and Quintessence Fund L.P. and shares voting and investment control over the securities held by QVT Fund LP and Quintessence Fund L.P. QVT Financial GP LLC is the general partner of QVT Financial LP and as such has complete discretion in the management and control of the business affairs of QVT Financial LP. QVT Associates GP LLC is the general partner of QVT Fund LP and Quintessence Fund L.P. and may be deemed to beneficially own the securities held by QVT Fund LP and Quintessence Fund L.P. The managing members of QVT Associates GP LLC are Daniel Gold, Nicholas Brumm, Arthur Chu and Tracy Fu. Each of QVT Financial LP, QVT Financial GP LLC, Daniel Gold, Nicholas Brumm, Arthur Chu and Tracy Fu disclaims beneficial ownership of the securities held by QVT Fund LP and Quintessence Fund L.P. QVT Associates GP LLC disclaims beneficial ownership of the securities held by QVT Fund LP and Quintessence Fund L.P., except to the extent of its pecuniary interest therein. (32) Vanguard Explorer Fund, through its nominee, Vanguard Explorer Fund c/o Brown Brothers Harriman Co., is managed by Wellington, an investment advisor registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. (33) (i) Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Active Small Cap Stock Portfolio, (ii) Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Multi-Strategy Global Equity Portfolio, (iii) Wellington Trust Company, National Association Multiple Collective Investment Funds Trust II, Small Cap Opportunities Portfolio and (iv) Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Small Cap Opportunities Portfolio, through its nominee, Finwell Co., are managed by Wellington, an investment advisor registered under the Investment Advisors Act of 1940, as amended. Wellington, in such capacity may be deemed to share beneficial ownership over the shares held by its client accounts. Table of Contents PLAN OF DISTRIBUTION We are registering the common stock issued to the selling stockholders to permit the resale of these shares of common stock by the holders of the common stock from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the common stock. We will bear all fees and expenses incident to our obligation to register the common stock. The selling stockholders and their successors, including their transferees, may sell all or a portion the securities directly to purchasers or through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or the purchasers of the securities. These discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may be in excess of those customary in the types of transactions involved. The securities may be sold in one or more transactions on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale, in the over-the-counter market or in transactions otherwise than on these exchanges or systems or in the over-the-counter market and in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions. Additionally, the selling stockholders may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. The selling stockholders may use any one or more of the following methods when selling shares: on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale, including, as of the date of this prospectus, the NYSE in the case of the common stock; in the over-the-counter market; in transactions otherwise than on these exchanges or services or in the over-the-counter market; through the writing or settlement of options or other hedging transactions, whether the options are listed on an options exchange or otherwise; ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; purchases by a broker-dealer as principal and resale by the broker-dealer for its account; an exchange distribution in accordance with the rules of the applicable exchange; privately negotiated transactions; settlement of short sales entered into after the effective date of the registration statement of which this prospectus forms a part; broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; a combination of any such methods of sale; and any other method permitted pursuant to applicable law. In addition, any securities that qualify for sale pursuant to Rule 144 or Regulation S under the Securities Act or under Section 4(1) under the Securities Act may be sold under such rules rather than pursuant to this prospectus, subject to any restriction on transfer contained in the Stock Purchase Agreement. The selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The selling stockholders may also sell short the securities and deliver common stock to close out short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The selling stockholders may Table of Contents also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The selling stockholders also may transfer and donate the common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The aggregate proceeds to the selling stockholders from the sale of the securities will be the purchase price of the securities less discounts and commissions, if any. In effecting sales, broker-dealers or agents engaged by the selling stockholders may arrange for other broker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the selling stockholders in amounts to be negotiated immediately prior to the sale; but, except as set forth in a supplement to this prospectus, in the case of an agency transaction will not be in excess of a customary brokerage commission in compliance with NASD Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASD IM-2440. In offering the securities covered by this prospectus, the selling stockholders and any broker-dealers who execute sales for the selling stockholders may be deemed to be underwriters within the meaning of Section 2(a)(11) of the Securities Act in connection with such sales. Any profits realized by the selling stockholders and the compensation of any broker-dealer may be deemed to be underwriting discounts and commissions. Selling stockholders who are underwriters within the meaning of Section 2(a)(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act and may be subject to certain statutory and regulatory liabilities, including liabilities imposed pursuant to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. As indicated in the selling stockholder table, several of the selling stockholders are affiliates of broker-dealers. Each such selling stockholder has represented to us that it acquired such selling stockholder s securities in the ordinary course of such selling stockholder s business and, at the time of the acquisition of the securities to be resold pursuant to this prospectus, such selling stockholder had no agreements or understandings, directly or indirectly, with any person to distribute them. In order to comply with the securities laws of certain states, if applicable, the securities must be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless the securities are registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. The anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of the securities pursuant to this prospectus and to the activities of the selling stockholders. In addition, we will make copies of this prospectus available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the common stock to engage in market-making activities with respect to the common stock. All of the foregoing may affect the marketability of the common stock and the ability of any person or entity to engage in market-making activities with respect to the common stock. There can be no assurance that any selling stockholder will sell any or all of the common stock registered pursuant to the registration statement of which this prospectus forms a part. We have agreed to indemnify the selling stockholders against certain liabilities, including certain liabilities under the Securities Act. We have also agreed, among other things, to bear substantially all expenses (other than underwriting discounts and selling commissions) in connection with the registration and sale of the securities covered by this prospectus. TABLE OF CONTENTS ABOUT THIS PROSPECTUS ii SUMMARY 1 RISK FACTORS 4

parsed_sections/risk_factors/2010/CIK0000873540_drinks_risk_factors.txt ADDED Viewed

The diff for this file is too large to render. See raw diff

parsed_sections/risk_factors/2010/CIK0000880562_daegis-inc_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS In evaluating the Company s business, readers should carefully consider the business risks discussed in this section in addition to the other information presented in this registration statement and in our other filings with the Commission. Deterioration in general economic conditions has caused and could cause additional decreases or delays in spending by customers and could harm our ability to generate license and maintenance revenues and our results of operations. The state of the global economy and availability of capital has and could further impact the spending patterns of existing and potential future customers. Any reduction in spending by, or loss of, existing or potential future customers would cause revenues to decline. Further, it may be difficult to adjust expenses and capital expenditures quickly enough to compensate for any unexpected revenue shortfall. Software license and maintenance purchases tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since most revenues are derived from sales of software licenses, the current deterioration in economic conditions has caused and could cause additional decreases in or delays in software spending and is likely to reduce software license revenues and negatively impact our short-term ability to grow revenues. Further, any decreased collectability of accounts receivable or early termination of agreements due to the current deterioration in economic conditions could negatively impact our results of operations. The exercise price of certain warrants may be substantially below the market price of our stock at the time of exercise which could potentially have a negative impact on our stock price. In conjunction with the acquisition of Gupta Technologies LLC in November 2006, we issued 670,000 warrants. As of April 30, 2010, there were 435,994 warrants issued as part of our debt financing that were outstanding which are exercisable at fixed exercise prices ranging from $1.35 per share to $1.90 per share. Subject to certain exceptions, these exercise prices are subject to downward adjustment in the event we issue additional shares of common stock at prices below the then-current exercise price. Exercise of the warrants is only likely to occur at such time as the exercise price is lower than the current market price for our stock. Issuance of common stock at a price below our current market price would have a dilutive effect on current stockholders and could potentially have a negative impact on our stock price. In conjunction with the acquisition of Daegis in June 2010, we obtained debt financing and issued 718,860 warrants which are exercisable at $3.30 per share. Subject to certain exceptions, these exercise prices are subject to downward adjustment in the event we issue additional shares of common stock at prices below the then-current exercise price. Exercise of the warrants is only likely to occur at such time as the exercise price is lower than the current market price for our stock. Issuance of common stock at a price below our current market price would have a dilutive effect on current stockholders and could potentially have a negative impact on our stock price. If we default on any secured loan, all or a portion of our assets could be subject to forfeiture. To finance the cash portion of the acquisition of Daegis and provide working capital, the Company entered into a new Revolving Credit & Term Loan Agreement with Hercules Technology on June 29, 2010 (the Hercules Loan Agreement ). Under the Hercules Loan Agreement, we granted to Hercules a first priority security interest in substantially all of our assets. If we default on the Hercules Loan Agreement and are unable to cure the default pursuant to the terms of the agreement, our lender could take possession of any or all assets in which it holds a security interest, including intellectual property, and dispose of those assets to the extent necessary to pay off the debts, which could seriously harm our business. Furthermore, we may enter into other secured credit or loan agreements in the future. The proceeds from the loan provided under the Hercules Loan Agreement were used to pay off the loans provided under the ComVest Loan Agreement and upon such pay-off ComVest s security interest was released. Acquisitions may have an adverse effect on our business. We expect to continue making acquisitions as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management s attention from our other businesses. These events could harm our operating results or financial condition. We are subject to intense competition. We have experienced and expect to continue to experience intense competition from current and future competitors including EMC, Epiq, FTI, IBM, Kroll Ontrack, Microsoft, Oracle, and Symantec. Often, these competitors have significantly greater financial, technical, marketing and other resources than Unify, in addition to having greater name recognition and more extensive customer bases. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could adversely affect our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competition, and the failure to do so would have an adverse effect upon our business, operating results and financial condition. The markets in which we compete are subject to rapid technological change. The markets in which we compete are characterized by rapid technological change, frequent introductions of new and enhanced products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend in part upon our ability to address the increasingly sophisticated needs of customers by developing new product functionality and enhancements that keep pace with technological developments, emerging industry standards and customer requirements. There can be no assurance that our products will continue to be perceived by our customers as technologically advantageous or that we will not experience difficulties that delay or prevent the sale of enhancements to existing products that meet with a significant degree of market acceptance. If the release dates of any future product enhancements, or new products are delayed, or if when released, they fail to achieve market acceptance, our business, operating results and financial condition would be adversely affected. We are dependent on indirect sales channels. A significant portion of our database and development tool revenues are derived from indirect sales channels, including ISVs, VARs and distributors. ISVs, VARs and distributors accounted for approximately 45%, 61% and 64% of our software license revenues for fiscal 2010, 2009 and 2008, respectively. Our success therefore depends in part upon the performance of our indirect sales channels, over which we have limited influence. Our ability to achieve significant revenue growth in the future depends in part on maintaining and expanding our indirect sales channels worldwide. The loss of any major partners, either to competitive products offered by other companies or to products developed internally by those partners, or the failure to attract effective new partners, could have an adverse effect on our business, operating results, and financial condition. There are numerous risks associated with our international operations and sales. Revenues derived from our international customers accounted for 50%, 68% and 78% of our total revenues, with the remainder from North America, in fiscal 2010, 2009 and 2008, respectively. If the revenues generated by our international operations are not adequate to offset the expense of maintaining such operations, our overall business, operating results and financial condition will be adversely affected. There can be no assurance that we will continue to be able to successfully market, sell and deliver our products in these markets. Although we have had international operations for a number of years, there are certain unique business challenges and risks inherent in doing business outside of North America, and such challenges and risks can vary from region to region. These include unexpected changes in regulatory requirements; export restrictions, tariffs and other trade barriers; difficulties in staffing and managing foreign operations; longer payment cycles; problems in collecting accounts receivable; political instability; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe and other parts of the world; unfamiliar or unusual business practices; and potentially adverse tax consequences, any of which could adversely impact the success of our international operations. There can be no assurance that one or more of these factors will not have an adverse effect on our future international operations and, consequently, on our business, operating results and financial condition. In addition, the Company s subsidiaries and distributors in Europe and Asia Pacific operate in local currencies. If the value of the U.S. dollar increases relative to foreign currencies, our business, operating results and financial condition could be adversely affected. Our stock price may be subject to volatility. Unify s common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the common stock to fluctuate, perhaps substantially, including: announcements of developments related to our business; fluctuations in the operating results and order levels of Unify or its competitors; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements from us or our competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; and developments in our relationships with our customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in our senior management team. In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of our common stock. Beginning on August 25, 2008, the Company s stock started trading on the NASDAQ. Prior to being traded on the NASDAQ, the Company s stock was traded over-the-counter on the bulletin board . Even though our stock is now traded on the NASDAQ, we do not receive any analyst coverage, our stock is thinly traded and our stock is considered to be micro-cap stock. Our stock is therefore subject to greater price volatility than larger companies whose stock trades more actively. Our quarterly operating results may be subject to fluctuations and seasonal variability. Unify s quarterly operating results have varied significantly in the past and we expect that they could vary significantly in the future. Such variations could result from the following factors: the size and timing of significant orders and their fulfillment; demand for our products; the quantity, timing and significance of our product enhancements and new product announcements or those of our competitors; our ability to attract and retain key employees; seasonality; changes in our pricing or our competitors ; realignments of our organizational structure; changes in the level of our operating expenses; incurrence of extraordinary operating expenses, changes in our sales incentive plans; budgeting cycles of our customers; customer order deferrals in anticipation of enhancements or new products offered by us or our competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions. Due to the foregoing factors, quarterly revenues and operating results may vary on a quarterly basis. Revenues and quarterly results may vary because software technology is rapidly evolving, and our sales cycle, from initial evaluation to purchase and the providing of maintenance services, can be lengthy and vary substantially from customer to customer. Because we normally deliver products within a short time of receiving an order, we typically do not have a backlog of orders. As a result, to achieve our quarterly revenue objectives, we are dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, we generally recognize a substantial portion of our software license revenues at the end of a quarter. Our expense levels largely reflect our expectations for future revenue and are therefore somewhat fixed in the short term. We expect that our operating results will continue to be affected by the continually challenging IT economic environment as well as by seasonal trends. In particular, we anticipate relatively weaker demand in the fiscal quarters ending July 31 and October 31 as a result of reduced business activity in Europe during the summer months. Our products are subject to lengthy sales cycles. Our archiving/eDiscovery solutions are used to implement governance and matter driven requirements and involve legal, IT and risk management departments. Our application modernization solutions are used to implement comprehensive solutions including complete technology platform transitions and new applications. The delivery of our application modernization solutions generally involves a four to ten week implementation time and a significant commitment of management attention and resources by prospective customers. Accordingly, our sales cycle is subject to delays associated with the long approval process that typically accompanies significant initiatives or capital expenditures. Our business, operating results, and financial condition could be adversely affected if customers reduce or delay orders. There can be no assurance that we will not continue to experience these and additional delays in the future. Such delays may contribute to significant fluctuations of quarterly operating results in the future and may adversely affect those results. 4.11 Form of 2009 Warrants 10-K 001-11807 4.11 July 22, 2009 4.12 Loan and Security Agreement, dated June 29, 2010, by and among Unify Corporation and Hercules Technology II, L.P. 8-K 001-11807 10.2 July 1, 2010 4.13 Registration Rights Agreement dated June 29, 2010 8-K 001-11807 10.3 July 1, 2010 4.14 Form of 2010 Warrant 8-K 001-11807 10.4 July 1, 2010 4.15 Form of Subordinated Indemnity Note 8-K 001-11807 10.5 July 1, 2010 4.16 Form of Subordinated Purchase Note 8-K 001-11807 10.6 July 1, 2010 5.1 Opinion of K&L Gates LLP X 10.1* 1991 Stock Option Plan, as amended S-1 001-11807 10.2 April 19, 1996 10.2* 2001 Stock Option Plan 10-Q 001-11807 10.9 March 14, 2002 10.3* Employment Agreement by and between Todd Wille and the Registrant dated December 29, 2000 10-K 001-11807 10.8 July 30, 2001 10.4 Note Exchange Agreement, dated April 16, 2009, between and among Unify and holders of certain convertible notes of AXS-One Inc., a Delaware corporation 8-K 001-11807 10.1 April 20, 2009 10.5* Employment Agreement by and between Kurt Jensen and the Registrant dated June 30, 2010 8-K 001-11807 10.7 July 1, 2010 10.7 Office Building Lease for Roseville, California facility, dated November 1, 2007, and amended November 21, 2007 10-K 001-11807 10.6 July 22, 2009 14 Code of Ethics for Senior Officers 10-K 001-11807 14 July 21, 2004 21.1 Subsidiaries of the Registrant 10-K 001-11807 21.1 July 12, 2010 23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm X 23.2 Consent of Grant Thornton LLP, Independent Certified Public Accountants. X 23.3 Consent of K&L Gates LLP (included in Exhibit 5.1) X 24.1 Powers of Attorney (included on signature page) Our software products could contain defects and could be subject to potential release delays. Software products frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. There can be no assurance that, despite testing by us and current and potential customers, defects and errors will not be found in current versions, new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues, delay in market acceptance, or unexpected re-programming costs, which could have an adverse effect upon our business, operating results and financial condition. Additionally, if the release dates of any future Unify product line additions or enhancements are delayed or if, when released, they fail to achieve market acceptance, our business, operating results, financial condition and cash flows would be adversely affected. Our license agreements may not protect us from product liability claims. The license agreements we have with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in these license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. The sale and support of current and future products may involve the risk of such claims, any of which are likely to be substantial in light of the use of these products in the development of core business applications. A successful product liability claim brought against the Company could have an adverse effect upon our business, operating results, and financial condition. We rely upon technology from certain third-party suppliers. Unify is dependent on third-party suppliers for software which is embedded in some of its products. We believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources or could be developed by the Company. However, if any such third-party licenses were terminated, or not renewed, or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to developing such products, which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs or reduced functionality could adversely affect our business, operating results and financial condition. We may be subject to violations of our intellectual property rights. Unify relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. Despite our efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our technology exists, piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights will be adequate and, to the extent such rights are not adequate, other companies could independently develop similar products using similar technology. Although there are no pending lawsuits against us regarding infringement of any existing patents or other intellectual property rights, and we have received no notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or if necessary obtain licenses on reasonable terms. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require that we seek licenses from third parties and prevent us from developing and selling our products. Any of these situations could have an adverse effect on our business, operating results, and financial condition. Our success is dependent upon the retention of key personnel and we may be unable to retain key employees. Our future performance depends on the continued service of key technical, sales and senior management personnel. With the exception of Unify s President and Chief Executive Officer and Executive Vice President and Chief Operating Officer, there are no other Unify technical, sales, executive or senior management personnel bound by an employment agreement. The loss of the services of one or more of our officers or other key employees could seriously harm our business, operating results and financial condition. Future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may fail to retain our key technical, sales and managerial employees, or attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. Rapid growth may significantly strain our resources. If we are able to achieve rapid and successful market acceptance of our current and future products, we may undergo a period of rapid growth. This expansion may significantly strain management, financial resources, customer support, operational and other resources. To accommodate this anticipated growth, we are continuing to implement a variety of new and upgraded operating and financial systems, procedures and controls, including the improvement of our internal management systems. There can be no assurance that such efforts can be accomplished successfully. Any failure to expand these areas in an efficient manner could have an adverse effect on our business, operating results, and financial condition. Moreover, there can be no assurance that our systems, procedures and controls will be adequate to support our future operations. Our disclosure controls and procedures and our internal control over financial reporting may not be effective to detect all errors or to detect and deter wrongdoing, fraud or improper activities in all instances. While we believe we currently have adequate internal control over financial reporting, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and fraud. In designing our control systems, management recognizes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further the design of a control system must reflect the necessity of considering the cost-benefit relationship of possible controls and procedures. Because of inherent limitations in any control system, no evaluation of controls can provide absolute assurance that all control issues and instances of wrongdoing, if any, that may affect our operations, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple error or mistake and that controls may be circumvented by individual acts by some person, by collusion of two or more people or by management s override of the control. The design of any control system also is based in part upon certain assumptions about the likelihood of a potential future event, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in cost-effective control systems, misstatements due to error or wrongdoing may occur and not be detected. Over time, it is also possible that controls may become inadequate because of changes in conditions that could not be, or were not, anticipated at inception or review of the control systems. Any breakdown in our control systems, whether or not foreseeable by management, could cause investors to lose confidence in the accuracy of our financial reporting and may have an adverse impact on our business and on the market price for Unify s common stock.

parsed_sections/risk_factors/2010/CIK0000883981_mortons_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our securities has a high degree of risk. We have listed below all of the known material risks and uncertainties affecting our Company. Before you invest you should carefully consider the risks and uncertainties described below and the other information contained in or incorporated by reference in this prospectus (as supplemented and amended). If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could decrease. This means you could lose all or a part of your investment in our securities. Risks Relating to our Business Our senior revolving credit facility matures in less than twelve months and we may be unable to refinance our credit facility. Our senior revolving credit facility matures on February 14, 2011. Our business may not generate sufficient cash flows from operations in the future and our currently anticipated growth in revenues and cash flows may not be realized, either or both of which could result in our being unable to repay indebtedness, including our senior revolving credit facility, or to fund other liquidity needs. If we do not have enough money, we may be required to refinance all or part of our then-existing debt, sell assets or borrow more money. We may not be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements, including our senior revolving credit facility, may restrict us from adopting any of these alternatives. Economic events have adversely impacted our business and results of operations and may continue to do so. Many parts of the world including the United States are currently in a recession and we believe that these weak general economic conditions could continue through 2010 and possibly beyond. The ongoing impacts of the housing crisis, high unemployment and financial market weakness may further exacerbate current economic conditions. As the economy struggles, our guests may become more apprehensive about the economy and/or related factors, and may reduce their level of discretionary spending. A decrease in spending due to lower consumer discretionary income or consumer confidence in the economy could impact the frequency with which our guests choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues and negatively affecting our operating results. Additionally, we believe there is a risk that if the current negative economic conditions persist for a long period of time and become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis. The current industry downturn is negatively impacting our business with significant revenue declines in fiscal 2009. We had a loss from continuing operations, net of taxes of $77.5 million in fiscal 2009, including a fourth quarter loss from continuing operations, net of taxes of $66.9 million, which included a charge of $52.9 million related to the full valuation allowance against U.S. deferred tax assets, pre-tax non-cash impairment charges of $30.0 million, a pre-tax charge of $9.9 million relating to the settlement of certain wage and hour claims and similar labor claims, and a charge of $1.3 million relating to the resignation of our former President and Chief Executive Officer. On March 4, 2009, we entered into the fifth amendment to our senior revolving credit facility which, among other things, reduced the facility from $115.0 million to $75.0 million, with a further reduction to $70.0 million effective December 31, 2009. As of July 4, 2010, we have $61.3 million outstanding under our senior revolving credit facility. The fifth amendment also reduced the annual maximum consolidated capital expenditures permitted and increased interest rates and certain fees payable under the senior revolving credit facility. Based on our current projections, we anticipate that we will be in compliance with the financial covenants under the amended senior revolving credit facility throughout fiscal 2010. However, if the weak economic environment deteriorates further, or is prolonged, resulting in continued revenue decreases, and our actions to respond to these conditions are not sufficient, we could fail to comply with one or more of the financial covenants. Table of Contents Changing discretionary spending patterns and general economic conditions could reduce our guest traffic and/or average revenue per guest, which would have an adverse effect on our revenues. Purchases at our restaurants are discretionary for our guests and, therefore, we are susceptible to economic slowdowns. In particular, our Morton s steakhouses cater primarily to business clientele and local fine-dining guests. We believe that the vast majority of our weekday revenues and a substantial portion of our weekend revenues from these restaurants are derived from business people using expense accounts. Accordingly, we believe that our business is particularly susceptible to any factors that cause a reduction in expense account or other dining by our business clientele. We also believe that consumers generally are more willing to make discretionary purchases, including high-end restaurant meals, during periods in which favorable economic conditions prevail. Changes in spending habits as a result of the current economic slowdown and reduction in consumer confidence have reduced our guest traffic, which adversely affected our revenues. The future performance of the U.S. economy and global economies are uncertain and are directly affected by numerous global and national factors, in addition to other factors that are beyond our control. These factors, which also affect discretionary consumer spending, include among other items, international, national, regional and local economic conditions, disposable consumer income, consumer confidence, terrorist attacks and the United States participation in military actions. We believe that these factors have adversely impacted our business and, should these conditions continue, worsen or be perceived to be worsening or should similar conditions occur in the future, we would expect them to continue to adversely impact our business. Our average restaurant revenues and our comparable revenues have decreased in the recent past and can cause our results of operations to fluctuate significantly. A number of factors have historically affected, and will continue to affect, our average restaurant revenues and comparable revenues, including, among other factors: our ability to execute our business strategy effectively; competition; consumer trends; introduction of new menu items; and general international, national, regional and local economic conditions. Our results of operations and revenues could be adversely affected by the inability to open new restaurants within anticipated time periods and budgets. There are a number of factors which may impact the amount of time and money required for the development and construction of new restaurants, including but not limited to, delays by the landlord, shortages of skilled labor, labor disputes, shortages of materials, delays with obtaining permits, local government regulations and weather interference. Our continued growth depends on our ability to open new restaurants and operate new restaurants profitably. A substantial majority of our historical growth has been due to opening new restaurants. When comparing fiscal 2009 to fiscal 2008, revenues due to the opening of six new restaurants (two in fiscal 2009 and four in fiscal 2008) represented 4.0% growth compared to total decline in revenues of (14.7)%. We experienced growth of 2.5%, 3.4% and 3.9% in our total revenues in fiscal 2009, fiscal 2008 and fiscal 2007, respectively, attributable to the revenues from our new restaurants opened in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, compared to total growth (decline) in revenues of (14.7)%, 1.1% and 11.0% in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Our ability to open new restaurants is dependent upon a number of factors, some of which are beyond our control, including but not limited to our ability to: find quality locations; reach acceptable agreements regarding the lease or purchase of locations; comply with capital expenditure restrictions set forth in our senior revolving credit facility; Table of Contents PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and may not contain all the information that you need to consider in making your investment decision. Before making a decision to purchase our common stock, you should read the entire prospectus carefully, including the Risk Factors and Forward-Looking Statements sections, and the documents incorporated by reference, as listed in Incorporated by Reference . Our Company As of September 30, 2010, with 76 Morton s steakhouses, we are the world s largest owner and operator of company-owned upscale steakhouse restaurants. This conclusion is based on the number of restaurants owned and operated by us as compared to our known competitors. In 1978, we opened the original Morton s in downtown Chicago, and since then have expanded to 76 Morton s steakhouses, including 71 domestic restaurants located in 64 cities across 26 states and San Juan, Puerto Rico, along with five international locations Hong Kong, Macau, Mexico City, Singapore and Toronto. We own and operate all of our restaurants and we do not have any franchisees. During fiscal 2009, we opened and began operating restaurants in Mexico City, Mexico (through a joint venture structure) and Miami Beach, Florida. We also own and operate one Italian restaurant, Trevi, which is located next to the Fountain of the Gods at The Forum Shops at Caesars in Las Vegas, NV. Trevi features caf dining with elaborate street lamps surrounding a fountain and a walk-up gelato/espresso bar. The menu features classic Italian favorites and a selection of new dishes. Our Morton s steakhouses offer premium quality steak, featuring USDA prime aged beef in the United States, fresh fish, lobster and chicken, complemented by a fully stocked bar and an extensive premium wine list that offers approximately 200 selections in all restaurants and a broader list of approximately 500 wines in selected restaurants. Due to restrictions imposed on the import of U.S. beef, Morton s steakhouses in Asia feature both USDA prime aged beef and comparable high quality aged beef. Management believes the high quality non-U.S. aged beef closely mirrors domestic standards and specifications. Our menu, and its tableside presentation by our servers, is designed to highlight our focus on quality while presenting sufficient menu options to appeal to a wide range of taste preferences. We own or have the rights to various trade names, trademarks and service marks, including Morton s, Morton s of Chicago, Morton s The Steakhouse and Trevi. Our Corporate Information Our principal executive office is located at 325 North LaSalle Street, Suite 500, Chicago, Illinois 60654, and our telephone number at that location is (312) 923-0030. Our corporate website address is www.mortons.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on, or accessible through, our website as part of this prospectus. THE OFFERING Securities offered shares of our common stock, of which are being offered by us and up to 6,325,912 are being offered by the selling stockholders. Common stock outstanding 16,707,593 shares. NYSE Symbol Our common stock is listed on the NYSE under the symbol MRT . Dividends We have never declared or paid any dividends or distributions on our common stock. We anticipate that for the foreseeable future all earnings will be retained for use in our business and no cash dividends will be paid to stockholders. Any payment of cash dividends in the future on our common stock will be dependent upon our financial condition, results of operations, current and anticipated cash requirements, plans for expansion, as well as other factors that the board of directors deems relevant. Table of Contents comply with applicable zoning, land use and environmental regulations; raise, borrow or have available an adequate amount of money for construction and opening costs; hire, train and retain the skilled management and other employees necessary to meet staffing needs in a timely manner; obtain, for an acceptable cost, required permits and approvals; successfully promote our new restaurants and compete in the markets in which our new restaurants are located; efficiently manage the amount of time and money used to build and open each new restaurant; address general economic conditions and conditions specific to the restaurant industry; and open additional restaurants within anticipated time periods and budgets. We are reviewing additional sites for potential future Morton s steakhouses. Typically, there has been a ramp-up period of one to two years before we expect a new Morton s steakhouse to achieve our targeted level of performance. This ramp-up period, however, could be longer if the weak economic environment continues. The delay in achieving our targeted level of performance is due to higher operating costs caused by start-up and other temporary inefficiencies associated with opening new restaurants such as lack of market familiarity and acceptance when we enter new markets and unavailability of experienced staff. We may not be able to attract enough guests to new restaurants because potential guests may be unfamiliar with our restaurants or the atmosphere or the menus of our restaurants might not appeal to them. As a result, the operating results generated at new restaurants may not equal the operating results generated at any of our existing restaurants. The restaurants may even operate at a loss, which could have a significant adverse effect on our overall operating results. In addition, opening a new restaurant in an existing market could reduce the revenue of our existing restaurants in that market. For these same reasons, many markets would not successfully support one of our restaurants. Furthermore, our ability to expand into non-U.S. markets also may be impacted by legal considerations such as restrictions on importing USDA prime aged beef from the United States. For example, we currently are not able to export some U.S. beef to our restaurants in Asia. Our existing senior personnel levels, restaurant management systems, financial controls, information systems and other systems and procedures may be inadequate to support our expansion, which could require us to incur substantial expenditures that could adversely affect our operating results. Additionally, on March 4, 2009, we entered into the fifth amendment to our senior revolving credit facility which reduced the facility from $115.0 million to $75.0 million, with a further reduction to $70.0 million effective December 31, 2009. As of July 4, 2010, we had outstanding borrowings of $61.3 million under our senior revolving credit facility. The amendment also reduced the annual maximum consolidated capital expenditures permitted. The reduction in borrowing capacity and permitted capital expenditures could adversely impact our ability to open new restaurants. Our restaurants may not be able to compete successfully with other restaurants and, as a result, we may not achieve our projected revenue and profitability targets. If our restaurants are unable to compete successfully with other restaurants in new and/or existing markets, we may not achieve our projected or historical revenue and profitability targets. Our industry is intensely competitive with respect to price, quality of service, restaurant location, ambiance of facilities and type and quality of food. We compete with national and regional restaurant chains and independently owned restaurants for guests, restaurant locations and qualified management and other restaurant staff. Compared to our business, some of our competitors may have greater financial and other resources, have been in business longer, have greater name recognition and be better established in the markets where our restaurants are located or are planned to be located. Our inability to compete successfully with other restaurants may force us to close one or more of our restaurants. Table of Contents During fiscal 2008, we closed our Morton s steakhouses in Kansas City and Charlotte (SouthPark). During fiscal 2009, we closed our Morton s steakhouses in Southfield, Westchester, Minneapolis, Columbus, Vancouver and Annapolis and may close other restaurants in the future. We closed our Bertolini s restaurant in Indianapolis, Indiana during fiscal 2008 and closed our Bertolini s restaurant in King of Prussia and sold our remaining Bertolini s restaurant in Las Vegas during fiscal 2009. Closing a restaurant would reduce our revenues, and could subject us to construction and other costs including but not limited to severance, legal and the write-down of leasehold improvements, equipment, furniture and fixtures. In addition, we could remain liable for remaining future lease obligations or for obligations under lease guaranties. Closing a restaurant could also adversely affect our reputation, brand or competitive position. Our success depends in part upon the continued popularity of upscale steakhouses. Shifts in consumer preferences away from this type of concept could materially adversely affect our operating results. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits. Our success depends in part on our ability to anticipate and respond to changing consumer preferences, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. Continued expansion by our competitors in the upscale steakhouse segment of the restaurant industry could prevent us from realizing anticipated benefits from new restaurant growth or continued growth in existing restaurant revenues. Our competitors have opened many upscale steakhouses in recent years and a key element of our strategy is to open new steakhouses in both new and existing markets. If we overestimate demand for Morton s steakhouses or underestimate the popularity of our competitors restaurants, we may be unable to realize anticipated revenues from new steakhouses. Similarly, if one or more of our competitors open new restaurants in any of our existing or anticipated markets, revenues in our steakhouses may be lower than we expect. Any unanticipated slowdown in demand in any of our restaurants due to industry growth or other factors could reduce our revenues and results of operations, which could cause the price of our common stock to decline substantially. Restaurant companies, including ours, have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature, if successful, could result in our payment of substantial damages. Our results of operations and liquidity may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees or guests. In recent years, a number of restaurant companies, including ours, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time alleging violations of various state and federal wage and hour laws regarding employee meal deductions, the sharing of tips amongst certain employees and failure to pay for all hours worked. We may incur substantial damages and expenses resulting from lawsuits, which would increase the cost of operating our business and decrease the cash available for other uses, and may require us to make additional borrowings under our senior revolving credit facility. For example, during fiscal 2009 and fiscal 2008, we recorded charges of $9.9 million and $3.7 million, respectively, relating to the settlement of certain wage and hour and similar labor claims filed against us. Litigation concerning food quality, health and other issues could impact our results of operations or require us to incur additional liabilities or cause guests to avoid our restaurants. Occasionally, our guests file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to our restaurants. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state laws regarding workplace and employment, discrimination and similar matters. In addition, we could become subject to class action lawsuits related to these matters in the future. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for any claims would materially adversely affect our financial condition, results of operations and liquidity. Adverse publicity resulting from these claims may negatively impact sales at one or more of our restaurants. Table of Contents Restaurants outside the United States expose us to uncertain conditions and other risks in international markets. We own and operate Morton s steakhouses in Hong Kong, Macau, Mexico City (through a joint venture structure), Singapore and Toronto. In addition, we plan to open a new Morton's The Steakhouse in Shanghai, China (through a joint venture structure), which is expected to open later in fiscal 2010. We face and will continue to face substantial risks associated with having foreign restaurants, including: economic or political instability, restrictions on or costs relating to the repatriation of foreign profits to the United States, including possible taxes or withholding obligations on any repatriation and the imposition of trade restrictions. These risks could have a significant impact on our international restaurants. Also, our restaurants outside of the United States are subject to risks relating to appropriate compliance with legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, potentially higher incidence of fraud or corruption, and potentially adverse tax consequences. We are also exposed to foreign currency exchange rate risk with respect to our revenues, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar. We have not used instruments to hedge certain foreign currency risks and are not protected against foreign currency fluctuations. As a result, our reported earnings may be affected by changes in foreign currency exchange rates. Moreover, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time. Taxing authorities may select to audit our international, federal, state and/or local tax returns from time to time, which may result in tax assessments and penalties that could have an adverse affect on our results of operations and financial condition. We are subject to federal, state and local taxes in the U.S. as well as taxation by the taxing authorities in countries where we have international operations. Although we believe that our tax reporting is reasonable, if any taxing authority disagrees with the positions taken by the Company on its tax returns, we could have additional tax liabilities, including interest and penalties, which, if material, could have an adverse impact on our results of operations and financial condition. Increases in the prices of, and/or reductions in the availability of, USDA prime aged beef and other food products could reduce our operating margins and our revenues. We purchase large quantities of beef, particularly USDA prime aged beef, which is subject to extreme price fluctuations due to seasonal shifts, climate conditions, industry demand and other factors. Our beef costs represented approximately 43%, 46% and 47% of our Morton s food and beverage costs during fiscal 2009, fiscal 2008 and fiscal 2007, respectively. The market for USDA prime aged beef is particularly volatile. For example, the impact of diminished prime grading in the spring of 2007, resulted in shortages of USDA prime aged beef, requiring us to pay significantly higher prices for the USDA prime aged beef we purchased during these periods. Because Morton s steakhouses feature USDA prime aged beef, we generally would expect to purchase USDA prime aged beef even if the price increased significantly. If prices for the types of beef we use in our restaurants increase in the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins would decrease, perhaps materially. If certain kinds of beef become unavailable for us to purchase, our revenues could decrease as well. We may experience higher operating costs, including increases in supply prices and employee salaries, wages and benefits, which will adversely affect our operating results if we cannot increase menu prices to cover them. If we increase the compensation or benefits to our employees or pay higher prices for food items or other supplies, we will have an increase in our operating costs. If we are unable or unwilling to increase our menu prices or take other actions to offset increased operating costs, our operating results will suffer. Many factors affect the prices that we pay for the various food and other items that we use to operate our restaurants, including seasonal fluctuations, longer term cycles and other fluctuations in livestock markets, changes in weather or demand and inflation. Factors that may affect the salaries and benefits that we pay to our employees include local unemployment rates and changes in minimum wage and employee benefits laws. Other factors that could cause our operating costs to increase include fuel prices, cost of gas and electricity, occupancy and related costs, maintenance expenditures and increases in other day-to-day expenses. In addition, various proposals that would require employers to provide Table of Contents health insurance for all of their employees are being considered from time-to-time in the U.S. Congress and various states. The imposition of any requirement that we provide health insurance to all employees on terms materially different from our existing programs could have an adverse effect on our operating performance. Additionally, health insurance costs in general have risen significantly over the past few years and are expected to continue to increase in 2010. These increases, as well as potential legislation requirements for employers to provide health insurance to employees, could have a negative impact on our profitability if we are not able to offset the effect of such increases with plan modifications and cost control measures, or by continuing to improve our operating efficiencies. Increases in the minimum wage could increase our labor costs. For example, under the Federal Minimum Wage Act of 2007, on July 24, 2009, the federal minimum wage increased to $7.25 per hour. In addition, certain states in which we operate restaurants have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage. If we are unable to offset the increased labor costs by increasing our menu prices or by other means, this could have a material adverse effect on our business and results of operations. Our operating results may fluctuate significantly due to the seasonality of our business and these fluctuations make it more difficult for us to predict accurately and address in a timely manner factors that may have a negative impact on our business. Our business is subject to seasonal fluctuations that may vary greatly depending upon the region in which a particular restaurant is located. These fluctuations can make it more difficult for us to predict accurately and address in a timely manner factors that may have a negative impact on our business. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. In addition, in the past we have incurred, and in the future are likely to incur, a net loss in the third quarter due to the seasonality of our business, with revenues generally being less in the third quarter primarily due to our reduced summer volume. Our results of operations are affected by a variety of factors, including severe weather conditions, and have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. Our results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. Our results of operations are affected by a variety of factors, including: the timing of new restaurant openings, the cost of opening new restaurants and the relative proportion of new restaurants to mature restaurants; changes in consumer preferences; general economic conditions; severe weather conditions; and actions by our competitors. Some of our restaurants are located in regions that may be susceptible to severe weather conditions. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our business. For example, our business was adversely impacted in the third and fourth quarters of fiscal 2005 due to hurricanes and severe weather in New Orleans and Florida. Therefore, you should not rely on our past results of operations as being indicative of the future. Negative factors or publicity surrounding our restaurants or the consumption of beef generally could adversely affect consumer taste, which could reduce sales in one or more of our restaurants and make our brand less valuable. Because our competitive strengths include the quality of our food and our restaurant facilities, we believe that adverse publicity relating to these factors or other similar concerns affects us more than it would restaurants that compete primarily on other factors. Any shifts in consumer preferences away from the kinds of food we offer, particularly beef, whether because of dietary or other health concerns or otherwise, would make our restaurants less appealing and adversely affect our revenues. Adverse changes involving any of these factors could further reduce our guest traffic and/or impose practical limits on pricing, which could further reduce our revenues and operating income. Table of Contents Instances of food-borne illness and outbreaks of disease, as well as negative publicity relating thereto, could result in reduced demand for our menu offerings and reduced traffic in our restaurants and negatively impact our business. Instances of food-borne illness, including Bovine Spongiform Encephalopathy, which is also known as BSE or mad cow disease, aphthous fever, which is also known as hoof and mouth disease, as well as hepatitis A, lysteria, salmonella and e-coli, whether or not traced to our restaurants, could reduce demand for our menu offerings. Outbreaks of disease, including severe acute respiratory syndrome, which is also known as SARS, Avian flu and other influenzas, could reduce traffic in our restaurants. Any of these events would negatively impact our business. In addition, any negative publicity relating to these and other health-related matters may affect consumers perceptions of our restaurants and the food that we offer, reduce guest visits to our restaurants and negatively impact demand for our menu offerings. Because our competitive strengths include the quality of our food, adverse publicity relating to these matters or other similar concerns affects us more than it would restaurants that compete primarily on other factors. We depend upon frequent deliveries of food and other supplies, in most cases from a limited number of suppliers, which subjects us to the possible risks of shortages, interruptions and price fluctuations. Our ability to maintain consistent quality throughout our restaurants depends in part upon our ability to acquire fresh food products, including USDA prime aged beef, and related items from reliable sources in accordance with our specifications and in sufficient quantities. We have relatively short-term contracts with a limited number of suppliers for the distribution of most meat and some food and other supplies for our restaurants. Our dependence on a small number of suppliers, as well as the limited number of available suppliers of USDA prime aged beef, subject us to the possible risks of shortages, interruptions and price fluctuations. If any of these suppliers do not perform adequately or otherwise fail to distribute products or supplies to our restaurants, we may be unable to replace the suppliers in a short period of time on acceptable terms. Our inability to replace our suppliers in a short period of time on acceptable terms could increase our costs and could cause shortages at our restaurants of food and other items that may cause us to remove certain items from a restaurant s menu or temporarily close a restaurant. If we temporarily close a restaurant or remove popular items from a restaurant s menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage and thereafter, as our guests may change their dining habits as a result. We have no long-term contracts for any food items used in our restaurants. We currently do not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of food and other supplies, which we purchase at prevailing market or contracted prices. We may incur additional costs or liabilities and lose revenues impacting operating results as a result of litigation and government regulation affecting the operation of our restaurants. Our business is subject to extensive federal, state, local and foreign government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic beverages, the sale and use of tobacco, zoning and building codes, land use and employee, health, sanitation and safety matters. Typically our restaurants licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause. Alcoholic beverage control regulations relate to various aspects of daily operations of our restaurants, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. The failure of any of our restaurants to timely obtain and maintain liquor or other licenses, permits or approvals required to serve alcoholic beverages or food could delay or prevent the opening of, or adversely impact the viability of, and any negative publicity related thereto could have an adverse effect on, the restaurant and we could lose significant revenue. Our restaurants are subject, in each state and in some of the foreign countries in which the Company operates, to dram shop laws or similar laws, which generally allow a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A judgment against us under dram shop laws or similar laws could exceed our liability insurance coverage policy limits and could result in substantial liability for us and have a material adverse effect on our results of operations. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on us. Table of Contents To the extent that governmental regulations impose material additional obligations on our suppliers, including, without limitation, regulations relating to the inspection or preparation of meat, food and other products used in our business, product availability could be limited and the prices that our suppliers charge us could increase. We may not be able to offset these costs through increased menu prices, which could have a material adverse effect on our business. If any of our restaurants were unable to serve particular food products, even for a short period of time, we could experience a reduction in our overall revenue, which could have a material adverse effect on us. In addition, further government regulation including laws restricting smoking in restaurants and bars may reduce guest traffic and adversely impact our sales. One or more of our restaurants could be subject to litigation and governmental fine, censure or closure in connection with issues relating to our food and/or our facilities. The food products that we serve, including meat and seafood, are susceptible to food borne illnesses. We and other restaurant companies have been named as defendants in actions seeking damages as a result of food borne illnesses and actions brought under state laws regarding notices with respect to chemicals contained in food products and regarding excess moisture in the business premises. To date, none of these matters has had a material adverse effect on our business, but that may not continue to be the case in the future. The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, working conditions, overtime and tip credits, health care, workers compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations such as those governing access for the disabled, including the Americans with Disabilities Act. If any of these costs were to increase and we were unable to offset the increase by increasing our menu prices or by other means, this could have a material adverse effect on our business and results of operations. As an example, because we have a significant number of restaurants located in various states, including eleven in California, nine in Florida and six in Illinois, regulatory changes in these states could have a disproportionate impact on our business. Legislation and regulations requiring the display and provision of nutritional information for our menu offerings in our restaurants could negatively impact our results of operations. The national health care reform legislation enacted on March 23, 2010, contains provisions that require restaurants with 20 or more locations to post calorie information on menus and additional nutritional information in writing at the restaurant. The FDA is currently drafting specific regulations which it must implement within one year from the date of passage of the federal legislation. Additionally, there is pending and new legislation by certain states and other municipalities relating to nutritional content, nutritional labeling and menu labeling regulations. These laws and regulations have required and will continue to require certain of our restaurant locations to include specified nutritional information on our menu and other materials presented to guests or to otherwise post such information in the restaurants. The requirements to post nutritional information on our menus or in our restaurants could reduce demand for our menu offerings, reduce guest traffic and/or reduce average revenue per guest, which would have an adverse effect on our revenue. In addition, we may incur expenses as a result of our compliance with such laws and regulations including costs relating to menu printing. Compliance may also increase our exposure to litigation or governmental investigations or proceedings. The failure to enforce and maintain our intellectual property rights could enable others to use names confusingly similar to Morton s, Morton s of Chicago, Morton s The Steakhouse and other names and marks used by our restaurants, which could adversely affect the value of the Morton s brand. We have registered the marks Morton s, Morton s of Chicago, Morton s The Steakhouse, Trevi and certain other marks used by our restaurants as trade names, trademarks or service marks in various states and/or the United States Patent and Trademark Office and in certain foreign countries. The success of our business depends on our continued ability to use our existing trade names, trademarks and service marks in order to increase our brand awareness. In that regard, we believe that our trade names, trademarks and service marks are valuable assets that are critical to our success. The unauthorized use or other misappropriation of our trade names, trademarks or service marks could diminish the value of our brands and restaurant concepts and may cause a decline in our revenue. We are aware of marks similar to those of our restaurants used and/or registered by third parties in certain limited geographical areas. Table of Contents We occupy most of our restaurants under long-term non-cancelable leases and we may be unable to renew leases at the end of their terms. Most of our restaurants are located in leased premises. Many of our current leases are non-cancelable and typically have terms ranging from 10 to 15 years with renewal options for terms ranging from five to 15 years. We believe that leases that we enter into in the future likely will also be long-term and non-cancelable and have similar renewal options. If we close a restaurant, we generally remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments with respect to leases for closed restaurants could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our restaurant leases, we may close or relocate a restaurant, which could subject us to construction and other costs and risks, and could have a material adverse effect on our business and results of operations. For example, closing a restaurant, even during the time of relocation, will reduce the sales that the restaurant would have contributed to our revenues. Additionally, the revenue and profit, if any, generated at a relocated restaurant may not equal the revenue and profit generated at the existing restaurant. Fixed rental expenses account for a significant portion of our operating expenses, which increases our vulnerability to general adverse economic and industry conditions and could limit our operating and financing flexibility. Rent expense incurred under our operating leases account for a significant portion of our operating expenses. For example, total rental expense from continuing operations, including additional rental payments based on sales at some of our restaurants, under operating leases was approximately $22.5 million (8.0% of our revenues), $24.9 million (7.6% of our revenues) and $22.2 million (6.8% of our revenues) for fiscal 2009, fiscal 2008 and fiscal 2007, respectively. In addition, as of July 4, 2010, we were a party to operating leases requiring future minimum lease payments aggregating approximately $127.3 million through fiscal 2014 and approximately $171.5 million thereafter. We expect that new restaurants we open will typically be leased by us under operating leases. Our substantial operating lease obligations could have significant negative consequences, including: increasing our vulnerability to general adverse economic and industry conditions; limiting our ability to obtain additional financing; requiring a substantial portion of our available cash to be applied to pay our rental obligations, thus reducing cash available for other purposes; limiting our flexibility in planning for or reacting to changes in our business or the industry in which we compete; and placing us at a disadvantage with respect to some of our competitors. We depend on cash flow from operations to pay our lease obligations and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to service our operating lease obligations, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would have a material adverse affect on us. In certain circumstances we have sought to renegotiate the terms of our leases. Our actions could result in the landlords claiming a default by us, terminating our leases and enforcing their rights as landlord under the terms of our leases. Any of these actions could result in litigation, delays and additional costs, which could have a material adverse impact on our business. Our level of indebtedness may adversely affect our financial condition, results of operations, limit our operational and financing flexibility and negatively impact our business. Our senior revolving credit facility, and other debt instruments we may enter into in the future, may have important consequences to the Company, including the following: our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; Table of Contents we may use a substantial portion of our cash flows from operations to pay interest on our indebtedness, which will reduce the funds available to us for operations and other purposes; our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and our level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business. We expect that we will depend primarily upon our operations to provide funds to pay our expenses and to pay any amounts due under our senior revolving credit facility and any other indebtedness we may incur. Our ability to make these payments depends on our future performance, which will be affected by various financial, business, economic and other factors, many of which we cannot control. Utilizing borrowed funds in order to implement a stock repurchase program may result in important consequences to us similar to those mentioned in regard to our senior revolving credit facility, including liquidity risk that could impair our ability to fund operations, obtain debt in the future and affect our financial condition. The terms of our senior revolving credit facility impose significant operating and financial restrictions on us that may impair our ability to respond to changing business and economic conditions. In February 2006, we entered into a senior revolving credit facility with a syndicate of financial institutions including affiliates of certain of the underwriters in the initial public offering. We have subsequently amended our senior revolving credit facility. Our indirect wholly-owned subsidiary, Morton s of Chicago, Inc., is the borrower under the facility. Our senior revolving credit facility matures on February 14, 2011. We and most of our other domestic subsidiaries are guarantors of the facility. The credit agreement is secured by substantially all of our present and future domestic subsidiaries assets and contains a number of significant restrictions and covenants that generally limit our ability to, among other things: pay dividends or purchase stock or make other restricted payments to our stockholders; incur additional indebtedness; borrow money or issue guarantees; make investments; use assets as security in other transactions; sell assets or merge with or into other companies; make capital expenditures; enter into transactions with affiliates; sell stock in our subsidiaries; and create or permit restrictions on our subsidiaries ability to make payments to us. The credit agreement limits our ability to engage in these types of transactions, even if we believe that a specific transaction would contribute to our future growth or improve our operating results. The credit agreement Table of Contents requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these provisions may be affected by events outside of our control. A breach of any of these provisions or our inability to comply with required financial ratios in our senior revolving credit facility could result in a default under the credit facility. If that were to occur, the lenders have the right to declare all borrowings to be immediately due and payable. In addition, the lenders have the right to declare all borrowings to be immediately due and payable upon the occurrence of certain change of control events relating to us. If we are unable to repay all borrowings when due, whether at maturity or if declared due and payable following a default or change of control event, the lenders have the right to proceed against the collateral granted to secure the indebtedness. If we breach these covenants or fail to comply with the terms of our senior revolving credit facility, or a change of control event occurs, lenders may declare all borrowings to be immediately due and payable, and may sell the assets pledged as collateral in order to repay those borrowings, which would have a material adverse effect on our cash flow and, to the extent that our assets are sold to repay borrowings, our restaurant business. In addition, we are exposed to market risk related to changes in interest rates because our senior revolving credit facility carries a floating rate of interest. Accordingly, our results of operations may be adversely affected by changes in interest rates. Assuming a 10% increase in the interest rate on our $70.0 million senior revolving credit facility, if the entire amount available under the facility were drawn, interest expense would increase by approximately $0.2 million over the course of 12 months. We could face labor shortages that could slow our growth and adversely impact our ability to operate our restaurants. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to keep pace with our anticipated expansion schedule and meet the needs of our existing restaurants. A sufficient number of qualified individuals of the requisite caliber to fill these positions may be in short supply in some areas. Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants and could adversely impact our existing restaurants. Any such delays, any material increases in employee turnover rates in existing restaurants or any widespread employee dissatisfaction could have a material adverse effect on our business and results of operations. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs and could have a material adverse effect on our results of operations. We depend on the services of key executives, the loss of whom could materially harm our business and our strategic direction if we were unable to replace them with executives of equal experience and capabilities. Some of our senior executives are important to our success because they are instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until a suitable replacement could be found. Neither our Chief Executive Officer nor our other executives are bound by employment agreements with us. We do not maintain key person life insurance policies on any of our executives. We have incurred, and we expect to continue to incur substantial expenses to meet our reporting obligations as a public company. In addition, failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses. Reporting obligations as a public company have placed and are likely to continue to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, so that our management can certify as to the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal controls over financial reporting, which requires us to document and test the design and operating effectiveness of our internal controls over financial reporting. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an unqualified opinion on the effectiveness of our internal controls over financial reporting, or if material weaknesses in our internal controls are identified, or if we fail to comply with other obligations imposed by the Sarbanes-Oxley Act or NYSE rules relating to corporate governance matters, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital. Table of Contents Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC s rules and forms. In connection with the preparation of our Annual Report on Form 10-K for fiscal 2009, an evaluation of the effectiveness of internal controls and procedures over financial reporting (as defined under the SEC rules) was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. The evaluation was carried out using criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that, as of January 3, 2010, the Company s internal controls and procedures over financial reporting were effective based on those criteria. No change in the Company s internal controls over financial reporting occurred during the fiscal quarter ended July 4, 2010 that has materially affected, or is reasonably likely to materially affect, the Company s internal controls over financial reporting. However, there can be no assurance that we will not discover any material weaknesses or deficiencies in our internal controls, including our internal controls over financial reporting and our disclosure controls and procedures, which could subject us to regulatory scrutiny and a loss of public confidence and could have a material adverse effect on our business and our stock price. Our current insurance policies may not provide adequate levels of coverage against all claims and we may incur losses that are not covered by our insurance. We believe we maintain insurance coverage that is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. For example, we believe that insurance covering liability for violations of wage and hour laws is generally not available. These losses, if they occur, could have a material adverse effect on our business and results of operations. Another spread of H1N1 or Similar Influenza May Adversely Affect Our Business. Another spread of H1N1, which is more commonly known as swine flu, or similar influenza, may adversely affect our business. Due to the outbreak of H1N1 influenza in Mexico, our restaurant in Mexico City, Mexico was temporarily closed on April 26, 2009 and reopened on May 6, 2009, initially, with certain general restrictions imposed by the local government to help prevent the spread of the H1N1 influenza. Our results of operations for this restaurant were adversely impacted while such restrictions were in place. We could also be adversely affected if other jurisdictions in which we have restaurants impose mandatory closures, seek voluntary closures or impose restrictions on operations. Past outbreaks of severe acute respiratory syndrome, which is also known as SARS, and Avian flu had a negative impact on our restaurants, and another outbreak of H1N1 influenza may also reduce traffic in our restaurants. H1N1 influenza also could adversely affect our ability to adequately staff our restaurants, receive deliveries on a timely basis and/or perform functions at the corporate level. Even if H1N1 influenza does not spread significantly, the perceived risk of infection or significant health risk may adversely affect our business. Risks Relating to our Common Stock Our future results may vary significantly in the future which may adversely affect the price of our common stock. It is possible that our quarterly revenues and operating results may vary significantly in the future and that period-to-period comparisons of our revenues and operating results are not necessarily meaningful indicators of the future. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our revenues and operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. Table of Contents We do not anticipate paying cash dividends for the foreseeable future, and therefore investors should not buy our stock if they wish to receive cash dividends. We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future. A significant number of our shares will be eligible for sale and their sale or potential sale may depress the market price of our common stock. Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. This prospectus covers shares of common stock, of which shares are being registered for sale by us and up to 6,325,912 shares are being registered for sale by the selling stockholders. As additional shares of our common stock become available for resale in the public market pursuant to this offering, and otherwise, the supply of our common stock will increase, which could decrease its price. Some or all of the shares of common stock may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our shares of common stock. If we fail to continue to comply with the listing requirements of the NYSE, the price of our common stock and our ability to access the capital markets could be negatively impacted. Our common stock is currently listed on the NYSE and we are subject to certain NYSE continued listing standards. We cannot provide any assurance that we will be able to continue to satisfy the requirements of the NYSE s continued listing standards. A delisting of our common stock could negatively affect the price and liquidity of our common stock and could impair our ability to raise capital in the future. Our stock price can be extremely volatile. The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to announcements of our business developments or those of our competitors, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our stock. We may not have an underwriter for our offering and so we cannot guarantee how much, if any, of the offering will be sold. The common shares may be offered on a best efforts basis by us. We have not retained an underwriter to assist in offering the common shares. We have limited experience in the offer and sale of securities, and as a result, we may be unable to sell any of the common shares. Because we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and experience further dilution. We are authorized to issue up to 100,000,000 shares of common stock, of which 16,707,593 shares of common stock are issued and outstanding as of September 30, 2010. An additional shares of common stock are being registered by us and will be issued and outstanding upon the consummation of this offering. Our board of directors has the authority to cause us to issue additional shares of common stock, and to determine the rights, preferences and privileges of such shares, without consent of any of our stockholders. Consequently, the stockholders may experience more dilution in their ownership of our stock in the future. Table of Contents

parsed_sections/risk_factors/2010/CIK0000885988_integramed_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the various risks of the investment, including those described below, together with all of the other information included in this prospectus. Additional risks may also impair our business operations and adversely affect our prospects. If any of the following risks actually occur, our business, financial condition or operating results could be adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. Risks Related to Our Business The loss of one or more of our Partner fertility centers would lead to a decline in our revenues and profit. The contracts that we enter into with our Partner fertility centers typically have terms that range from 10 to 25 years and contain automatic renewal provisions. Some of these agreements also contain provisions that allow the Partner fertility center to terminate the agreement, upon 12 months prior notice, at any time after five years from the agreement s effective date. Our two largest Partner fertility centers provided approximately 34% of our Fertility Centers Division revenues for the year ended December 31, 2008. If either of these Partner fertility centers, or any of our other Partner fertility centers, were to terminate its agreement with us, we would lose all of the revenues associated with such Partner fertility center, but would not experience any meaningful reduction in our infrastructure costs. We may not be able to find suitable Partner candidates or successfully integrate the operations of the fertility centers with which we enter into Partner contracts. A key part of our business strategy is to enter into additional Partner contracts. We cannot assure you that we will be able to find suitable Partner candidates or that the fertility centers that we enter into Partner contracts with will be successful. Even if suitable Partner candidates are identified, negotiation over suitable terms and conditions may be protracted and unsuccessful, and we may not be able to achieve planned increases in the number of Partner centers. Further, achieving the anticipated benefits of current and possible future Partner contracts will depend in part upon whether we can integrate the operations of those fertility centers with our operations in a timely and cost-effective manner. The process of integrating the operations of Partner fertility centers with our operations is complex, expensive and time consuming and involves a number of risks, including, but not limited to: difficulties in integrating or retaining key medical providers of the Partner fertility center; difficulties in integrating the operations of the Partner fertility center, such as information technology resources and financial and operational data; diversion of our management s attention; and potential incompatibility of cultures. We are dependent on the medical providers in our fertility centers and vein clinics to successfully execute our business strategy. Although we manage our fertility centers and vein clinics, the medical providers at those centers and clinics provide medical services directly to patients and we do not have control over their medical activities. We cannot guarantee any medical provider s ability to generate positive patient outcomes, build a positive reputation for their practice or to comply with our expectations. If the medical providers in our fertility centers and vein clinics act negligently or unethically, allow their medical Table of Contents practices to deteriorate or do not meet our growth expectations, it could diminish the value of our brand and our results of operations could be adversely affected. We may have difficulty attracting and retaining physicians for our fertility centers and vein clinics. A key part of our business strategy is to enter into additional Partner contracts and open new vein clinics. The success of our fertility centers is dependent upon our ability to retain the key medical providers associated with those centers. If one or more key medical providers were to depart from a fertility center, our business could suffer. Our ability to open new vein clinics is dependent upon identifying, recruiting and retaining qualified physicians to perform procedures at these clinics. We have had difficulties staffing new vein clinics because some third-party payors require that the physicians performing procedures at these clinics have certain specified credentials. We will not be able to implement successfully our business strategy if we are unable to properly staff our fertility centers and vein clinics. A reduction in reimbursements or an inability to negotiate attractive reimbursement rates from third-party payors for the services that our Partner centers or vein clinics provide could adversely affect our revenues and growth. A significant portion of our fertility Partner and vein clinic revenues depends on reimbursements to the underlying physician practices from third-party payors. These third parties include private health insurers and other organizations, such as health maintenance organizations, as well as government authorities. Third parties are systematically challenging prices charged for medical treatment. A third-party payor may deny or reduce reimbursement if it determines that a prescribed treatment is not used in accordance with cost-effective treatment methods, as determined by the payor, or is experimental, unnecessary or inappropriate. In addition, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourage use of our services, even if those services are safer or more effective than alternative services. A reduction in reimbursements from third-party payors, whether in the form of changes to reimbursement contracts, such as by limiting reimbursement for certain procedures to specialists, loss of reimbursement contracts, solvency issues on the part of the payors, or in the case of our vein clinics, changes in Medicare reimbursement, would cause patients to reduce their treatments or obtain services from other providers and could reduce our revenues and profitability. Our ability to profitably open vein clinics in new markets also significantly depends on our ability to obtain attractive reimbursement rates from third-party payors in those new markets. If we are unable to obtain satisfactory reimbursement rates from third-party payors for vein clinics in new markets, our growth would suffer. In early 2009, one of our top fertility centers in the Midwest terminated a reimbursement contract with an important third-party payor. Contribution from this fertility center in 2008 was approximately $2.3 million and this third-party payor represented approximately 20% of this contribution, or approximately $460,000. Health care reform could impact the demand for our services. There are currently numerous proposals on the federal and state levels for comprehensive reforms relating to health care that could affect payment and reimbursement for health care services in the United States. The U.S. Congress is considering legislation that could dramatically overhaul the health care system, including the possibility of a government health care plan. We cannot predict whether any such reforms will ultimately be adopted or the impact that such reforms may have on the demand or payment for our services. Because our Attain IVF programs are self-pay programs for patients that do not have insurance coverage for fertility treatments, health care reform that increases insurance coverage for fertility treatments could lead to a decrease in demand for our Attain IVF programs. Table of Contents We face competition from existing providers, as well as new providers entering our markets. Our business divisions operate in highly competitive areas. Our fertility centers compete with national, regional and local physician practice fertility centers, hospitals and university medical centers, some of which have programs that compete with our Attain IVF programs. Our fertility centers may also compete with fertility centers located outside of the United States, due to the self-pay nature of IVF treatment. Our vein clinics compete with other vein care clinic providers, dermatologist and surgical clinics that provide ELT and sclerotherapy as an ancillary offering, vascular surgeons and interventional radiologists. Barriers to entry in the vein care industry are low. New health care providers that enter our markets impact our market share, patient volume and growth rates. Increased competitive pressures require us to commit resources to marketing efforts, which impacts our margins and profitability. There can be no assurance that our fertility centers or vein clinics will be able to compete effectively with existing providers in our markets or that new competitors will not enter into our markets. These existing and new competitors may have greater financial and other resources than we or our fertility centers or vein clinics do. Increased competition could also make it more difficult for us to expand our business by entering into new contracts with fertility centers or opening new vein clinics. The development of alternative treatments could diminish demand for our services. The fertility and vein care industries are dynamic, and new, technologically intensive treatments are constantly under development. New treatments that are more effective or provide better reimbursement could decrease patient demand or profitability for the treatments that our fertility centers or vein clinics currently offer. If our fertility centers or vein clinics do not adopt new treatments as they are developed, patients could seek treatment elsewhere. If we are found not to be in compliance with applicable laws and regulations, we could be subject to significant fines or penalties, be forced to curtail certain of our operations or rearrange material agreements to our detriment. We are subject to numerous federal and state laws and regulations, including, but not limited to, federal and state anti-kickback laws, controlled substances laws, the federal Stark law and state self-referral laws, false claims laws, the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ), Medicare and Medicaid regulations and laws regulating the business of insurance. These laws and regulations are extremely complex and could be subject to various interpretations. Our fertility centers and vein clinics are also subject to these statutes, but we do not oversee, nor are we responsible for, their compliance with these laws. Many aspects of our business, to date, have not been the subject of federal or state regulatory review and we, and any of our fertility centers or vein clinics, may not have been in compliance at all times with all applicable laws and regulations. If we, or our fertility centers or vein clinics, are found by a court or regulatory authority to have violated any applicable laws or regulations, we could be subject to significant fines or penalties or be forced to curtail certain of our operations. Further, the laws of many states prohibit physicians from splitting fees with non-physicians, or other physicians, and prohibit non-physician entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. Many aspects of our business, to date, have not been the subject of judicial or regulatory interpretation; thus, a review of our business by courts or regulatory authorities may result in determinations that could adversely affect our operations. In addition, the health care regulatory environment could change so as to restrict our existing operations or their expansion. State corporate practice of medicine laws may be interpreted as prohibiting corporations or associations from exercising control over physicians or employing nurse practitioners or physician assistants and may prohibit physicians from practicing medicine in partnership with, or as employees of, any person not licensed to practice medicine. Table of Contents State regulators may seek to challenge the arrangements that we have with our fertility centers and vein clinics. A determination in any state that we are engaged in the corporate practice of medicine or any unlawful fee-splitting arrangement could render any management agreement between us and a practice located in such state unenforceable or subject to modification, which could have an adverse effect on our financial condition and results of operations. Regulatory authorities or other parties may assert that we are or a practice is engaged in the corporate practice of medicine or that the management fees paid to us by the managed practices constitute unlawful fee-splitting or the corporate practice of medicine. If such a claim were asserted successfully, we could be subject to civil and criminal penalties, managed physicians could have restrictions imposed upon their licenses to practice medicine, parts or all of our existing management agreements could be rendered unenforceable and we could be required to restructure our contractual arrangements with the managed practices, all of which could have an adverse effect on our financial condition and results of operations. Although we view our Attain IVF Refund program as a guaranty or warranty of our fertility centers performance and our Attain IVF Multi-Cycle program as a lower-cost alternative, our Attain IVF Refund program and our Attain IVF Multi-Cycle program each have several characteristics that are present in an insurance contract. As such, an insurance regulator in a particular state may find that we have been and are engaged in the business of insurance without a license, which could subject us to criminal and civil liabilities and would subject either or both of our Attain IVF programs to substantial regulation in that state as an insurance contract, including burdensome reserve requirements. In addition, in states that prohibit physicians from splitting professional fees with non-physicians, we could be required to restructure our Attain IVF programs if a state concluded that our Attain IVF programs constituted fee splitting because we retain a portion of the payments patients pay directly to us for their medical treatment by our fertility centers. The imposition of any such liabilities and any such changes in our method of doing business would likely reduce revenues and contribution from our Consumer Services Division. Additionally, our management agreements with our vein clinics provide that the vein clinics will pay us a fee equal to 150% of our expenses of operating and managing the vein clinics. These fees have historically exceeded the operating margin generated by any particular vein clinic prior to payment of the management fee. Accordingly, each vein clinic only pays the portion of the management fee that is equal to the amount of revenue generated by the clinic annually up to the 150% amount. As a result, our vein clinics do not generate any net profits at year end. A state regulator could find that such a compensation model is actually based on a percentage of the revenue of a particular vein clinic or that our management fee is not commensurate with the services we provide, in which case our management agreements would be violating fee-splitting laws of certain states where we operate vein clinics. We could be forced to restructure the fee structure under the management agreements to our material financial detriment or the providers affiliated with our vein clinics who have been found to violate the fee-splitting statutes or regulations may be subject to disciplinary action or criminal sanctions, which could lead to the closure of one or more of our vein clinics. Our arrangements with our fertility centers and vein clinics may trigger the application of federal and various state franchise laws. We have never sought to comply with any such franchise laws, nor have we ever sought any exemptions from such laws. The U.S. Federal Trade Commission could bring an enforcement action against us for failure to comply with federal franchise laws and could impose significant fines against us, order us to pay restitution to the fertility centers and vein clinics that are found to be franchisees (and the physicians that own or operate them) and/or seek criminal sanctions against us. Under the laws of certain of the states in which we operate, the physicians that own or operate our fertility centers and vein clinics may bring private causes of actions against us for violating such laws. In many of these jurisdictions, in addition to a judgment for actual damages, a court could award the physicians rescission, attorney s fees and costs and treble damages. Additionally, we could be subject to fines and criminal sanctions. Even if we were to comply with these federal and state franchise Table of Contents laws, we would still be potentially liable for prior violations that occurred prior to the time we came into compliance with such laws. New or enhanced laws and regulations affecting the fertility industry could increase our costs of compliance and force us to alter certain of our operations. A number of high profile events have occurred recently related to ART and fertility practices generally, such as the implantation of a greater than recommended number of embryos, resulting in extraordinarily high-order multiple births, or the implantation of incorrect patient embryos. Federal and state regulators may more carefully scrutinize the fertility industry as a result of these events, and may adopt more stringent laws and regulations that could increase our compliance costs or force us to alter certain of our operations. We and our Partner fertility centers and vein clinics may not have sufficient liability insurance to cover potential claims. The medical procedures performed by physicians and other medical personnel in our network of fertility centers and vein clinics can involve significant complications, including genetically defective births, embryo loss and patient death. We are likely to be, and from time to time have been, named as a party in legal proceedings involving medical malpractice or other injuries that occur at one of our fertility centers or vein clinics, particularly in those fertility centers where we provide the services of a physician assistant or nurse practitioner. A successful malpractice claim could exceed the limits of insurance that we maintain, in which case we would have to fund any settlement in excess of our insurance coverage. We also maintain medical malpractice insurance coverage for our Partner fertility centers and vein clinics, and a successful malpractice claim against one of those centers or clinics in excess of the coverage we maintain for them would adversely affect the revenues we derive from those centers and clinics. In addition, the captive insurance company that provides a portion of our insurance coverage does not maintain reserves in amounts that would be required of other, larger insurers, and therefore may not have adequate capital to fund a claim against us or the Partner fertility centers covered by the captive insurance company. A malpractice claim, whether or not successful, could be costly to defend, could consume management resources and could adversely affect our reputation and business and the reputations and businesses of our Partner fertility centers and vein clinics. We also cannot assure you that we or our Partner fertility centers or vein clinics will be able to obtain insurance coverage in the future on commercially reasonable terms, or at all. Our success depends on retaining key members of our management team. The success of our business strategy depends on the continued contribution of key members of our management team. The loss of key members of this team could disrupt our growth plans and our ability to implement our business strategy. We rely on a limited number of third-party vendors for medicine and supplies. Our fertility centers and vein clinics rely on a limited number of third-party vendors that produce medications and supplies vital to patient treatment, such as AngioDynamics, Inc., which provides the only U.S. Food and Drug Administration approved solution used in sclerotherapy. If any of these vendors were to experience a supply shortage or cease doing business, and we were unable to find an alternative third-party vendor, we might not be able to properly serve our patients. Table of Contents Our credit agreement contains covenants that impose restrictions on us that may limit our operating flexibility, prevent us from entering into extraordinary transactions that benefit our stockholders and limit our growth. Our credit agreement contains covenants that restrict our flexibility to conduct business. These covenants prohibit or limit, among other things: the payment of dividends to our stockholders; the incurrence of additional indebtedness; the making of certain types of restricted payments and investments; sales of assets; and consolidations, mergers and transfers of all or substantially all of our assets. The credit agreement also requires that we maintain certain leverage and fixed charge ratios and minimum levels of earnings before interest, taxes, depreciation and amortization. Our failure to comply with any of these covenants could cause the lenders to declare a default and accelerate amounts due to them under the credit agreement. In addition, our credit agreement places certain restrictions on our ability to acquire the business, assets or capital stock of fertility centers. For example, our credit agreement prevents us from acquiring a fertility center for a purchase price in excess of $5.5 million (increasing to $6.0 million after August 31, 2010) without the prior written consent of our lender. In addition, our credit agreement prevents us from making acquisitions of fertility centers that aggregate in excess of $11 million for the period from August 1, 2009 through July 31, 2010, or that exceed $12 million for the period after August 1, 2010. If we identify fertility centers that we want to acquire in excess of limits in our credit agreement and do not obtain the consent of our lender to those acquisitions, we may not be able to execute on our strategy. Our failure to maintain effective internal control over financial reporting could lead to inaccuracies in our reported financial results. On October 28, 2009, management concluded that our audited financial statements for the years ended December 31, 2006, 2007 and 2008 needed to be restated for the correction of errors. In addition, we identified a material weakness in the design of our internal control over financial reporting in connection with the accounting for our Attain IVF Refund Program. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If our independent registered public accounting firm were to determine that this deficiency were to still exist, or another new or related deficiency were to develop, or if we were otherwise unable to achieve and maintain effective internal controls on a timely basis, management would not be able to conclude that we have effective internal control over financial reporting for purposes of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, our independent registered public accounting firm would not be able to certify as to the effectiveness of our internal control over financial reporting. Moreover, any failure to establish and maintain effective systems of internal control and procedures may impair our ability to accurately report our financial results. Such failures and the reporting that our system of internal controls over financial reporting was not effective could result in a restatement of our financial statements and cause investors to lose confidence in the reliability of our financial statements, which could result in a decline in our stock price. Table of Contents We may not have adequate protection for our intellectual property rights. Trade secrets and other proprietary information not protected by patents are critical to our business. Our sole means of protecting this information is to utilize confidentiality agreements with employees, third parties and consultants. If these agreements are breached, another entity could obtain our trade secrets and proprietary information and attempt to replicate our business model, which could have an adverse effect on our business. We could be subject to additional income tax liabilities We are subject to income taxes in various states within the United States. Judgment is often required in evaluating our provision for income taxes. During the ordinary course of business, there are certain transactions for which the ultimate tax determination is uncertain. For example, certain taxing authorities may take the position that we are providing services in jurisdictions where our Partner fertility centers operate. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows. Risks Relating to an Investment in our Common Stock The trading price of our common stock could be subject to volatility. The average daily trading volume of our shares of common stock on the Nasdaq Global Market for the nine months ended September 30, 2009 was approximately 7,158 shares. Because the shares of our common stock are lightly traded, they are subject to volatile price fluctuations, which may make it difficult for you to sell our common stock when you want or at prices you find attractive. In the past, following periods of volatility in the market price of a company s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management s attention and resources, and could have a material adverse effect on our financial condition. Future sales or the potential for future sales of our common stock may cause the trading price of our common stock to decline. Sales of a substantial number of shares of our common stock by our two largest stockholders, or by any of our other significant stockholders, or the perception that these sales may occur, could cause the market price of our common stock to decline. Approximately 43.5% of our outstanding common stock is currently held by two investor groups. If either of these groups, or any other significant stockholders, were to attempt to sell all or part of their positions in the public market, our stock price could fall substantially. In addition, our directors and executive officers and IAT, who beneficially owned an aggregate of 3,485,318 shares of our common stock as of February 1, 2010, are subject to lock-up agreements that restrict their ability to transfer their shares of our common stock for 90 days following the date of this prospectus. The market price of shares of our common stock may decrease if a significant number of these shares are sold when the restrictions on their sale lapse. Table of Contents We will have broad discretion in applying the net proceeds of this offering and may not use those proceeds in ways that will enhance the market value of our common stock. We have significant flexibility in applying the net proceeds we will receive in this offering. Although we may use the net proceeds that we receive in this offering to accelerate the addition of new Partner fertility centers and the pace of opening new vein clinics, we have no obligation to do so and we may apply the net proceeds of this offering for working capital and general corporate purposes. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from this offering favorably. You will incur immediate and substantial dilution as a result of this offering. The public offering price per share of our common stock in this offering is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, you will incur immediate and substantial dilution of $8.07 per share, representing the difference between the assumed public offering price of $8.26 per share and our tangible net book value per share of $0.19, each as of September 30, 2009. Our future capital needs could result in dilution of your investment. Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would likely dilute the ownership interests of the investors in this offering and may dilute the net tangible book value per share of our common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to our current stockholders which may adversely impact our current stockholders. We do not intend to pay cash dividends on our common stock for the foreseeable future. We have not paid cash dividends on our common stock during the last two fiscal years, and we do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. In addition, our credit agreement prohibits us from paying cash dividends on our common stock. Because we do not anticipate paying cash dividends on our common stock in the foreseeable future, the return on your investment on our common stock will depend solely on a change, if any, in the market value of our common stock. Our certificate of incorporation, by-laws and Delaware law could limit another party s ability to acquire us, even if an acquisition would be beneficial to our stockholders. A number of provisions in our certificate of incorporation and by-laws make it difficult for another company to acquire us, even if doing so would benefit our stockholders. For example, our certificate of incorporation authorizes our board of directors to issue blank check preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval. The rights of holders of our common stock could be adversely affected by the terms of any preferred stock that may be issued in the future. In addition, our by-laws limit the ability of our stockholders to call special meetings or fill vacancies on the board. Table of Contents Also, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock. Table of Contents

parsed_sections/risk_factors/2010/CIK0000892160_derma_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS This investment involves a high degree of risk and you should purchase shares only if you can afford a complete loss of your investment. Consider carefully these risk factors and other information in this prospectus. Risks Associated with Our Business We have a history of losses and can offer no assurance of future profitability. We incurred losses of $3,961,937 in 2008, $2,284,605 in 2007, $1,099,990 in 2005, $2,338,693 in 2004, $2,581,337 in 2000, $2,998,919 in 1999 and $1,178,978 for the nine months ended September 30, 2009 (unaudited). At September 30, 2009, we had an accumulated deficit of $20,842,801 (unaudited). We cannot offer any assurance that we will be able to generate sustained or significant future earnings. Our liquidity may be dependent upon amounts available under our existing line of credit or amounts available through additional debt or equity financings. We have a history of operating losses and negative cash flow from operating activities. As such, we have utilized funds from offerings of our equity securities and lines of credit to fund our operations. We have taken steps to improve our overall liquidity and believe we have sufficient liquidity to meet our needs for the foreseeable future. However, in the event our cash flow from operating activities is insufficient to meet our requirements, we may be forced either to refinance our current line of credit or seek additional equity financing. The sale of additional securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. There can be no assurance that such financing would be available or, if available, that such financing could be obtained upon terms acceptable to us. Our foreign operations are essential to our economic success and are subject to various unique risks. Our future operations and earnings will depend to a large extent on the results of our operations in Canada and our ability to maintain a continuous supply of basic wound care products from our operations in China and suppliers in China and Mexico. While we do not envision any adverse change to our operations in Canada, China or Mexico, adverse changes to these operations, as a result of political, governmental, regulatory, economic, exchange rate, labor, logistical or other factors, could have an adverse effect on our future operating results. The rate of reimbursement for the purchase of our products by government and private insurance is subject to change. Sales of several of our wound care products depend partly on the ability of our customers to obtain reimbursement for the cost of our products from government health administration agencies such as Medicare and Medicaid. Both government health administration agencies and private insurance firms continuously seek to reduce healthcare costs. Our ability to commercialize our products successfully will depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly approved medical products. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect: Our ability to set a price we believe is fair for our products; Our ability to generate revenues or achieve or maintain profitability; and The availability to us of capital. Payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement, particularly for new therapeutic products or if there is a perception that the target indication of the new product is well-served by existing drugs or other treatments. Accordingly, even if coverage and reimbursement are provided, market acceptance of our products would be adversely affected if the amount of coverage and/or reimbursement available for the use of our products proved to be unprofitable for healthcare providers or less profitable than alternative treatments. TABLE OF CONTENTS There have been federal and state proposals to subject the pricing of healthcare goods and services to government control and to make other changes to the U.S. healthcare system. While we cannot predict the outcome of current or future legislation, we anticipate, particularly given President Obama s focus on healthcare reform, that Congress and state legislatures will introduce initiatives directed at lowering the total cost of healthcare. In addition, in certain foreign markets the pricing of drugs is subject to government control and reimbursement may in some cases be unavailable or insufficient. It is uncertain if future legislative proposals, whether domestic or abroad, will be adopted that might affect our products. It is also uncertain what actions federal, state or private payors for healthcare treatment and services may take in response to any such healthcare reform proposals or legislation. Any such healthcare reforms could have a material and adverse effect on the marketability of any products for which we ultimately receive FDA or other regulatory agency approval or for which we receive government sponsored reimbursements. Our success may depend upon our ability to protect our patents and proprietary technology. We own patents, both in the United States and abroad, for several of our products, and rely upon the protection afforded by our patents and trade secrets to protect our technology. Our future success, if any, may depend upon our ability to protect our intellectual property. However, the enforcement of intellectual property rights can be both expensive and time consuming. Therefore, we may not be able to devote the resources necessary to prevent infringement of our intellectual property. Also, our competitors may develop or acquire substantially similar technologies without infringing our patents or trade secrets. For these reasons, we cannot be certain that our patents and proprietary technology will provide us with a competitive advantage. Government regulation plays a significant role in our ability to acquire and market products. Government regulation by the United States Food and Drug Administration and similar agencies in other countries is a significant factor in the development, manufacturing and marketing of many of our products and in our acquisition or licensing of new products. Complying with government regulations is often time consuming and expensive and may involve delays or actions adversely impacting the marketing and sale of our current or future products. Approximately forty percent of our products are sourced from third parties. Approximately forty percent of our products are sourced in raw, semi-finished and finished form directly from third party suppliers. None of these suppliers presently account for more than ten percent of our sales. We maintain good relations with our third party suppliers. There are several third party suppliers available for each of our products. If a current supplier were unable or unwilling to continue to supply our products, sale of the affected products could be delayed for the period necessary to secure a replacement. The technology utilized in many of our advanced wound care products is licensed from third parties and could become unavailable. Many of our advanced wound care products utilize technology that we license on an exclusive basis from third parties. These products include Medihoney dressings, Bioguard dressings and MedEfficiencyTM total contact casts. The licensing agreements that we have with the owners of these technologies are of limited duration and renewals of the agreements are in the discretion of the licensors. In addition, the maintenance of the license agreements requires that we meet various minimum sales and minimum royalty requirements. If we fail to meet the minimum sales or minimum royalty requirements of a given license agreement, there is a possibility that the agreement will be cancelled or not renewed or that our exclusivity under the license agreement will be withdrawn. If any of these events were to occur, our ability to sell the products utilizing the licensed technology could be lost or compromised and our revenues and potential profits could be adversely affected. Competitors could invent products superior to ours and cause our products and technology to become obsolete. We operate in an industry where technological developments occur at a rapid pace. We compete with a large number of established companies and institutions many of which have more capital, larger staffs and greater expertise than we do. We also compete with a number of smaller companies. Our competitors TABLE OF CONTENTS currently manufacture and distribute a variety of products that are in many respects comparable to our products. While management has no specific knowledge of products under development by our competitors, it is possible that these competitors may develop technologies and products that are more effective than any we currently have. If this occurs, any of our products and technology affected by these developments could become obsolete. Although we are insured, any material product liability claims could adversely affect our business. We sell over-the-counter products and medical devices and are exposed to the risk of lawsuits claiming alleged injury caused by our products. Among the grounds for potential claims against us are injuries due to alleged product inefficacy and injuries resulting from infection due to allegedly non-sterile products. Although we carry product liability insurance with limits of $1.0 million per occurrence and $2.0 million aggregate with $10.0 million in umbrella coverage, this insurance may not be adequate to reimburse us for all damages that we could suffer as a result of successful product liability claims. No material product liability claim has ever been made against us and we are not aware of any pending product liability claims. However, a successful material product liability suit could adversely affect our business. Risks Associated with this Offering and Our Capital Structure The potential increase in common shares due to the conversion, exercise or vesting of outstanding dilutive securities may have a depressive effect upon the market value of our shares. Up to 2,563,599 shares of our common stock are potentially issuable upon the conversion, exercise or vesting of outstanding convertible preferred stock, warrants and options ( dilutive securities ). The shares of common stock potentially issuable upon conversion, exercise or vesting of dilutive securities are substantial compared to the 5,039,468 shares of common stock currently outstanding. Earnings per share of common stock may be substantially diluted by the existence of these dilutive securities regardless of whether they are converted, exercised or issued. This dilution of earnings per share could have a depressive effect upon the market value of our common stock. Our stock price has been volatile and this volatility is likely to continue. Historically, the market price of our common stock has been volatile. The high and low prices for the years 2004 through 2009 are set forth in the table below: Derma Sciences, Inc. Trading Range Common Stock Year Low High 2004 $ 3.44 $ 15.20 2005 $ 3.36 $ 6.24 2006 $ 3.60 $ 7.20 2007 $ 4.64 $ 11.20 2008 $ 1.60 $ 10.80 2009 $ 1.92 $ 6.80 Events that may affect our common stock price include: Quarter to quarter variations in our operating results; Changes in earnings estimates by securities analysts; Changes in interest rates or other general economic conditions; Changes in market conditions in the wound care and skin care industries; Fluctuations in stock market prices and trading volumes of similar companies; Discussion of us or our stock price by the financial and scientific press and in online investor communities; TABLE OF CONTENTS Additions or departures of key personnel; Changes in third party reimbursement policies; The introduction of new products either by us or by our competitors; and The loss of a major customer. Although all publicly traded securities are subject to price and volume fluctuations, it is likely that our common stock will experience these fluctuations to a greater degree than the securities of more established and better capitalized organizations. We have not paid, and we are unlikely to pay in the near future, cash dividends on our securities. We have never paid any cash dividends on our common or preferred stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends by us will depend on our future earnings, financial condition and such other business and economic factors as our management may consider relevant. If members of our management and their affiliates were to exercise all warrants and options held by them, and if substantially all of the authorized but unissued restricted stock awards that were granted to members of management and were to vest, members of management and their affiliates could acquire effective control of us. The executive officers and directors, together with institutions with which they are affiliated, own substantial amounts of our common stock, together with outstanding options and warrants to purchase our common stock. In addition, we have adopted, and our shareholders have approved, a restricted stock plan pursuant to which our outside directors and executive officers may be awarded up to 312,500 shares of restricted stock. Outside directors have been awarded to date 21,875 shares of restricted common stock. Depending upon the warrants and options exercised by outside investors, if directors, executive officers and affiliates were to exercise their options and warrants, and if additional shares of restricted stock are awarded to our directors and executive officers and such awards vest, members of management and their affiliates could obtain effective control of us. As a result, these officers, directors and affiliates would be in a position to significantly influence our strategic direction, the composition of our board of directors and the outcome of fundamental transactions requiring shareholder approval. Our common stock does not have a vigorous trading market and you may not be able to sell your securities when desired. We have a limited active public market for our common shares. We cannot assure you that a more active public market will develop thereby allowing you to sell large quantities of our shares. Consequently, you may not be able to readily liquidate your investment. Our common stock may be delisted from the NASDAQ Capital Market which could negatively impact the price of our common stock and our ability to access the capital markets. The listing standards of the NASDAQ Capital Market (referred to as the NASDAQ Market ) provide that a company, in order to qualify for continued listing, must maintain a minimum stock price of $1.00 and satisfy standards relative to minimum shareholders equity, minimum market value of publicly held shares and various additional requirements. If we fail to comply with all listing standards applicable to issuers listed on the NASDAQ Market, our common stock may be delisted. If our common stock is delisted, it could reduce the price of our common stock and the levels of liquidity available to our shareholders. In addition, the delisting of our common stock could materially adversely affect our access to the capital markets and any limitation on liquidity or reduction in the price of our common stock could materially adversely affect our ability to raise capital. Delisting from the NASDAQ Market could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities. The liquidity of our common stock and market capitalization could be adversely affected by our reverse stock split. We implemented a 1-for-8 reverse split of our common and preferred stock on January 28, 2010. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in our TABLE OF CONTENTS price per share and overall market capitalization. If the per share market price does not increase proportionately as a result of the reverse split, then our value as measured by our market capitalization will be reduced, perhaps significantly.

parsed_sections/risk_factors/2010/CIK0000921768_bbx_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS You should carefully consider the following risks, as well as all other information contained or incorporated by reference in this prospectus, including our financial statements and related notes, before deciding to purchase shares of our Class A Common Stock. Our business, operating results or financial condition could be materially and adversely affected by any of these risks. As a result, the trading price of our Class A Common Stock could decline, perhaps significantly, and you could lose part or all of your investment. Risks Related to Bancorp and BankAtlantic We have incurred significant losses during the last three years, and if we continue to incur significant losses we will need to raise additional capital, which may not be available on attractive terms, if at all. We have incurred losses of $22.2 million, $202.6 million and $185.8 million during the years ended December 31, 2007, December 31, 2008 and December 31, 2009, respectively. In addition, we incurred a loss of $71.8 million during the six months ended June 30, 2010. As part of its efforts to maintain regulatory capital ratios, BankAtlantic has reduced its assets and repaid borrowings. However, the reduction of earning asset balances has resulted in reduced income while at the same time BankAtlantic has experienced significant credit losses. BankAtlantic s capital ratios at June 30, 2010 exceeded well capitalized regulatory levels. We contributed $65 million and $105 million to the capital of BankAtlantic during the years ended December 31, 2008 and 2009, respectively, and $28 million to the capital of BankAtlantic during the first half of 2010. Our ability to contribute additional capital to BankAtlantic will depend on our ability to liquidate our portfolio of non-performing loans and on our ability to raise capital in the secondary markets. At June 30, 2010, we had $8.4 million of liquid assets. While our wholly-owned work out subsidiary holds a portfolio of approximately $17.1 million of nonperforming loans, net of reserves, $2.9 million of performing loans and $9.8 million of real estate owned which it could seek to liquidate, our sources of funds to continue to support BankAtlantic are limited. In addition, our ability to raise additional capital will depend on, among other things, conditions in the financial markets at the time, which are outside of our control, and our financial condition, results of operations and prospects. The ongoing economic uncertainty and the loss of confidence in financial institutions may make it more difficult or more costly to obtain financing. The Office of Thrift Supervision ( OTS ) has the right to impose additional capital requirements on banks at its discretion and could impose additional capital requirements on BankAtlantic. If BankAtlantic sustains additional operating losses or if the OTS imposes more stringent capital requirements, then we may not be in a position to provide the additional capital, if needed, in order for BankAtlantic to meet its capital requirements in future periods. In light of the current challenging economic environment and the desire for us to be in a position to provide capital to BankAtlantic, we have and will continue to evaluate the advisability of raising additional funds through the issuance of securities. Any such financing could be obtained through additional public offerings (including through at-the-market offerings), private offerings, in privately negotiated transactions or otherwise. We could pursue these financings at the Bancorp parent company level or directly at BankAtlantic or both. Issuances of equity directly at BankAtlantic would dilute our interest in BankAtlantic. In February 2010, we filed a shelf registration statement with the SEC registering to offer, from time to time, up to $75 million of Class A Common Stock, preferred stock, subscription rights, warrants or debt securities. In July 2010, we completed a $20 million rights offering to our shareholders under our shelf registration statement and issued an aggregate of 13,340,379 shares of Class A Common Stock. We currently have approximately $55 million remaining on our shelf registration statement. We are conducting this offering of $125 million of our Class A Common Stock on Form S-1 rather than pursuant to our shelf registration statement because the amount being offered exceeds the remaining availability under our shelf registration statement. However, we may use our existing shelf registration statement to conduct future offerings that do not exceed the remaining availability. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our shareholders bear the risks associated with future offerings at the Bancorp parent company level diluting their interests in our common stock and reducing the price of our Class A Common Table of Contents Stock and any future offerings directly at BankAtlantic diluting our interest in BankAtlantic. In addition, preferred stock, if issued, may have a preference on dividend payments that would limit our ability to make a dividend distribution to the holders of our Class A Common Stock in the future. Further, upon liquidation, holders of our preferred stock and debt securities and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A Common Stock. We have deferred interest on our outstanding junior subordinated debentures and anticipate that we will continue to defer this interest for the foreseeable future, which could adversely affect our financial condition and liquidity. We began deferring interest on all of our $294 million of junior subordinated debentures as of March 2009, which resulted in the deferral and accrual of $14.1 million and $6.8 million of regularly scheduled quarterly interest payments that would otherwise have been paid during the year ended December 31, 2009 and the six months ended June 30, 2010, respectively. The terms of the junior subordinated debentures allow us to defer interest payments for up to 20 consecutive quarterly periods, and we anticipate that we will continue to defer such interest for the foreseeable future. During the deferral period, interest continues to accrue on the junior subordinated debentures, as well as on the deferred interest, at the relevant stated coupon rate, and at the end of the deferral period, we will be required to pay all interest accrued during the deferral period. In the event that we elect to defer interest on our junior subordinated debentures for the full 20 consecutive quarterly periods permitted under the terms of the junior subordinated debentures, we would owe approximately $72.6 million of accrued interest as of December 31, 2013 (based on average interest rates applicable at June 30, 2010, which were at historically low interest rate levels). As most of the outstanding junior subordinated debentures bear interest at rates that are indexed to LIBOR, if LIBOR rates increase, the interest that would accrue during the deferral period would be significantly higher and likewise increase the amount that we would owe at the conclusion of the deferral period. Historically, we have relied on dividends from BankAtlantic to service our debt and pay dividends, but no dividends from BankAtlantic are anticipated or contemplated for the foreseeable future. Generally, a financial institution is permitted to make a capital distribution without prior OTS approval in an amount equal to its net income for the current calendar year to date, plus retained net income for the previous two years, provided that the financial institution would not become under-capitalized as a result of the distribution. Because BankAtlantic had an accumulated deficit for the prior two years, BankAtlantic is required to obtain approval from the OTS in order to make capital distributions to us. BankAtlantic does not intend to seek to make any capital distribution for the foreseeable future. The decline in the Florida real estate market has adversely affected, and may continue to adversely affect, our earnings and financial condition. The continued deterioration of economic conditions in the Florida residential real estate market, including the continued decline in median home prices year-over-year in all major metropolitan areas in Florida, and the downturn in the Florida commercial real estate market, resulted in a substantial increase in BankAtlantic s non-performing assets and provision for loan losses over the past three years. The housing industry is in the midst of a substantial and prolonged downturn reflecting, in part, decreased availability of mortgage financing for residential home buyers, reduced demand for new construction resulting in a significant over-supply of housing inventory and increased foreclosure rates. Additionally, the deteriorating condition of the Florida economy and these adverse market conditions have negatively impacted the commercial non-residential real estate market. BankAtlantic s earnings and financial condition were adversely impacted over the past three years as the majority of its loans are secured by real estate in Florida. We expect that our earnings and financial condition will continue to be unfavorably impacted if market conditions do not improve or deteriorate further. At June 30, 2010, BankAtlantic s loan portfolio included $288.6 million of non-accrual loans concentrated in Florida, which represented approximately 8.1% of BankAtlantic s total loans at June 30, 2010. Table of Contents Our loan portfolio is concentrated in loans secured by real estate, which makes us very susceptible to credit losses given the current depressed real estate market. Conditions in the United States real estate market have deteriorated significantly beginning in 2007, particularly in Florida, BankAtlantic s primary lending area. BankAtlantic s loan portfolio is concentrated in commercial real estate loans (most of which are located in Florida and many of which involve residential land development), residential mortgages (nationwide), and consumer home-equity loans (throughout BankAtlantic s markets in Florida). BankAtlantic has a heightened exposure to credit losses that may arise from this concentration as a result of the significant downturn in the Florida real estate markets. At June 30, 2010, BankAtlantic s loan portfolio included $2.2 billion of loans concentrated in Florida, which represented approximately 63% of its loan portfolio. We believe that BankAtlantic s commercial residential loan portfolio has significant exposure to further declines in the Florida real estate market. As of June 30, 2010: (i) the builder land bank loan category held by BankAtlantic consisted of five loans and aggregated $17.5 million, all of which were on non-accrual; (ii) the land acquisition and development loan category held by BankAtlantic consisted of 23 loans and aggregated $145.7 million, of which 9 loans aggregating $62.1 million were on non-accrual; and (iii) the land acquisition, development and construction loan category held by BankAtlantic consisted of four loans and aggregated $6.1 million, none of which were on non-accrual. In addition to the loans described above, Bancorp formed an asset workout subsidiary which acquired non-performing commercial residential real estate loans from BankAtlantic during 2008. The balance of these loans as of June 30, 2010 was $27.3 million, with $6.0 million, $4.6 million, $8.2 million and $8.5 million of builder land bank loans, land acquisition and development loans, land acquisition, development and construction loans and commercial loans , respectively. Market conditions have resulted in, and may in the future continue to result in, our commercial real estate borrowers having difficulty selling lots or homes in their developments for an extended period, which in turn could result in an increase in residential construction loan delinquencies and non-accrual balances. Additionally, if the current depressed economic environment continues or deteriorates further, collateral values may decline further which likely would result in increased credit losses in these loans. Included in the commercial and construction and development real estate loans are approximately $789.6 million of commercial non-residential and commercial land loans at June 30, 2010. A borrower s ability to repay these loans is dependent upon maintaining tenants through the life of the loan or the borrower s successful operation of its business. Weak economic conditions may impair a borrower s business operations and typically slow the execution of new leases. Such economic conditions may also lead to existing lease turnover. As a result of these factors, vacancy rates for retail, office and industrial space may remain elevated or continue to rise during the remainder of 2010. Increased vacancies could result in rents falling further over the next several quarters. The combination of these factors could result in further deterioration in real estate market conditions, and BankAtlantic may recognize higher credit losses on these loans, which would adversely affect our results of operations and financial condition. BankAtlantic s commercial real estate loan portfolio included 14 large lending relationships totaling $372.7 million at June 30, 2010, of which $118.2 million were non-performing at June 30, 2010. Further defaults by any of these borrowers could have a material adverse effect on BankAtlantic s results. BankAtlantic s purchased residential loan portfolio has been adversely impacted by the sustained decline in residential property values and high unemployment rates nationwide, resulting in higher delinquencies and foreclosures on residential real estate loans, including the jumbo residential loans which comprise the majority of our residential loan portfolio. As a consequence of these adverse trends, the residential allowance for loan losses significantly increased at December 31, 2009 compared to the years ended December 31, 2008 and 2007 and further increased for the six months ended June 30, 2010. At June 30, 2010, BankAtlantic s loan portfolio included $1.4 billion of residential real estate loans, which represented approximately 39% of its loan portfolio. The majority of BankAtlantic s residential loans are purchased residential jumbo loans and certain of these loans could potentially have outstanding loan balances significantly higher than related collateral values Table of Contents Exhibit Index Exhibit Number Description Reference 1 .1 Form of Underwriting Agreement To be filed by amendment. 3 .1 Restated Articles of Incorporation Exhibit 3.1 to the Registrant s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, filed on August 14, 2001. 3 .2 Articles of Amendment to the Restated Articles of Incorporation, effective May 20, 2008 Appendix A to the Registrant s Definitive Proxy Statement on Schedule 14A, filed on May 5, 2008. 3 .3 Articles of Amendment to the Restated Articles of Incorporation, effective September 24, 2008 Exhibit 3.4 to the Registrant s Current Report on Form 8-K, filed on September 26, 2008. 3 .4 Articles of Amendment to the Restated Articles of Incorporation, effective September 26, 2008 Exhibit 3.4 to the Registrant s Current Report on Form 8-K, filed on September 26, 2008. 3 .5 Articles of Amendment to the Restated Articles of Incorporation, effective May 19, 2009 Appendix A to the Registrant s Definitive Proxy Statement on Schedule 14A, filed on April 29, 2009. 3 .6 Amended and Restated Bylaws Amendment No. 1 to Form 10-K for the year ended December 31, 2007, filed on April 29, 2008. 5 .1 Opinion of Stearns Weaver Miller, et al re: Legality of Securities being registered To be filed by amendment. 10 .1 Amendments to Stock Option Plans Exhibit 10.1 to the Registrant s quarterly report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003. 10 .2 2005 Restricted Stock and Option Plan Appendix B to the Registrant s Definitive Proxy Statement on Schedule 14A, filed on April 29, 2009. 10 .4 2004 Restricted Stock Incentive Plan Appendix A to the Registrant s Definitive Proxy Statement filed on April 12, 2004. 10 .5 1998 Ryan Beck Stock Option Plan Appendix A, Exhibit B to the Registrant s Registration statement on Form S-4 filed on May 26, 1998 (Registration No. 333-53107.) 10 .6 BankAtlantic Bancorp 2000 Non-qualified Stock Option Plan Form 10-K for the year ended December 31, 2001, filed on March 30, 2002. 10 .7 BankAtlantic Bancorp 1996 Stock Option Plan Appendix A to the Registrant s Definitive Proxy Statement filed on April 25, 1996. 10 .8 BankAtlantic Bancorp 1998 Stock Option Plan Appendix C to the Registrant s Definitive Proxy Statement filed on June 22, 1999 10 .12 BankAtlantic Bancorp 1999 Stock Option Plan Appendix C to the Registrant s Definitive Proxy Statement filed on June 22, 1999. 10 .13 BankAtlantic Bancorp 1999 Non-qualified Stock Option Plan* Form 10-K for the year ended December 31, 2001, filed on March 30, 2002. 10 .18 Employment agreement of Lloyd B. DeVaux Form 10-K for the year ended December 31, 2001 filed on March 30, 2002. Table of Contents Exhibit Number Description Reference 10 .19(b) BankAtlantic Split Dollar Life Insurance Plan Agreement with Alan B. Levan Form 10-K for the year ended December 31, 2001, filed on March 30, 2002. 10 .19(c) Corrective amendment to BankAtlantic Split Dollar Life Insurance Plan Agreement Form 10-K for the year ended December 31, 2001, filed on March 30, 2002. 10 .20 Indenture for the Registrant s 8.50% Junior Subordinated Debentures due 2027 held by BBC Capital Trust II Exhibit 4.4 to the Registrant s form S-3A, filed on October 24, 2001 (Registration 333-71594 and 333-71594-01). 10 .21 Amended and Restated Trust Agreement of BBC Capital Trust II Exhibit 4.9 to the Registrant s Registration Statement From S-3A, filed on October 27, 2001 (Registration Nos. 333-71594 and 333-71594-01). 10 .22 Amended and Restated Declaration of Trust of BBC Capital Statutory Trust III Exhibit 10.1 to the Registrant s quarterly report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002. 10 .23 Indenture for the Registrant s Floating Rate Junior Subordinated Deferrable Interest Debentures held by BBC Capital Trust III Exhibit 10.2 to the Registrant s quarterly report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002. 10 .24 Amended and Restated Declaration of Trust of BBC Capital Statutory Trust IV Exhibit 10.1 to the Registrant s quarterly report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002. 10 .25 Indenture for the Registrant s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 held by BBC Capital Statutory Trust IV Exhibit 10.2 to the Registrant s quarterly report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002. 10 .26 Amended and Restated Trust Agreement of BBC Capital Trust V Exhibit 10.3 to the Registrant s quarterly report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002. 10 .27 Indenture for the Registrant s Floating Rate Junior Subordinated Notes due 2032 held by BBC Capital Trust V Exhibit 10.3 to the Registrant s quarterly report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002. 10 .28 Indenture for the Company s Floating Rate Junior Subordinated Notes due 2032 held by BBC Capital Trust VI Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. 10 .29 Amended and Restated Trust Agreement of BBC Capital Trust VI Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. 10 .30 Indenture for the Company s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 held by BBC Capital Statutory Trust VII Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. 10 .31 Amended and Restated Declaration of Trust of BBC Capital Statutory Trust VII Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. 10 .32 Indenture for the Company s Floating Rate Junior Subordinated Debt Securities due 2033 held by BBC Capital Trust VIII Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. 10 .33 Amended and Restated Declaration of Trust of BBC Capital Trust VIII Form 10-K for the year ended December 31, 2002, filed on March 31, 2003. Table of Contents as a result of declines in home prices. Additionally, loans that were originated during 2005, 2006 and 2007 have experienced greater deterioration in collateral value than loans originated in prior years resulting in higher loss experiences in these groups of loans. Also, approximately $522 million of residential loans, or 39.5% of our residential loan portfolio, at June 30, 2010, were secured by homes in California, Florida, Arizona and Nevada which are states that have experienced especially elevated foreclosures, delinquency rates and property value declines. BankAtlantic s consumer loan portfolio is concentrated in home equity loans collateralized by Florida properties primarily located in the markets where BankAtlantic operates its store network. The decline in residential real estate prices and higher unemployment throughout Florida has resulted in an increase in mortgage delinquencies and higher foreclosure rates. Additionally, in response to the turmoil in the credit markets, financial institutions have tightened underwriting standards which has limited borrowers ability to refinance. These conditions have adversely impacted delinquencies and credit loss trends in BankAtlantic s home equity loan portfolio and it does not currently appear that these conditions will improve in the near term. At June 30, 2010, approximately 75% of the loans in BankAtlantic s home equity portfolio were residential second mortgages, and BankAtlantic experienced higher delinquencies and credit losses in this portfolio during 2009 and the first and second quarters of 2010. If current economic conditions do not improve and home prices continue to fall, BankAtlantic may continue to experience higher credit losses from this loan portfolio. Since the collateral for this portfolio consists primarily of second mortgages, it is unlikely that BankAtlantic will be successful in recovering all or any portion of its loan proceeds in the event of a default unless BankAtlantic is prepared to repay the first mortgage and such repayment and the costs associated with a foreclosure are justified by the value of the property. An increase in BankAtlantic s allowance for loan losses will result in reduced earnings. As a lender, BankAtlantic is exposed to the risk that its customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment. BankAtlantic s management evaluates the collectability of BankAtlantic s loan portfolio and provides an allowance for loan losses that it believes is adequate based upon such factors as: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have probable loss potential; delinquency trends; estimated fair value of the collateral; current economic conditions; the views of its regulators; and geographic and industry loan concentrations. Many of these factors are difficult to predict or estimate accurately, particularly in a changing economic environment. The process of determining the estimated losses inherent in BankAtlantic s loan portfolio requires subjective and complex judgments, and the level of uncertainty concerning economic conditions may adversely affect BankAtlantic s ability to estimate the losses incurred in its loan portfolio. If BankAtlantic s evaluation is incorrect and borrower defaults cause losses exceeding the portion of the allowance for loan losses allocated to those loans or if BankAtlantic perceives adverse trends that require it to significantly increase its allowance for loan losses in the future, our earnings could be significantly and adversely affected. Increases in the allowance for loan losses with respect to the loans held by our asset workout subsidiary, or losses in that portfolio which exceed the current allowance assigned to that portfolio, would similarly adversely affect us. Table of Contents Adverse events in Florida, where our business is currently concentrated, could adversely impact our results and future growth. BankAtlantic s business, the location of its stores, the primary source of repayment for its small business loans and the real estate collateralizing its commercial real estate loans (and the loans held by our asset workout subsidiary) and its home equity loans are primarily concentrated in Florida. As a result, we are exposed to geographic risks because increasing unemployment, declines in the housing industry and declines in the real estate market are more severe in Florida than in the rest of the country. Adverse changes in laws and regulations in Florida would have a greater negative impact on our revenues, financial condition and business than on similar institutions in markets outside of Florida. Further, the State of Florida is subject to the risks of natural disasters such as tropical storms and hurricanes, which may disrupt our operations, adversely impact the ability of our borrowers to timely repay their loans and the value of any collateral held by us or otherwise have an adverse effect on our results of operations. The severity and impact of tropical storms, hurricanes and other weather related events are difficult to predict and may be exacerbated by global climate change. BankAtlantic s interest-only residential loans expose it to greater credit risk. As of June 30, 2010, approximately $640.0 million of BankAtlantic s purchased residential loan portfolio consisted of interest-only loans, which represented approximately 49% of the total purchased residential loan portfolio. While these loans are not considered sub-prime or negative amortizing loans, they are loans with reduced initial loan payments with the potential for significant increases in monthly loan payments in subsequent periods, even if interest rates do not rise, as required amortization of the principal commences. Monthly loan payments will also increase as interest rates increase. This presents a potential repayment risk if the borrower is unable to meet the higher debt service obligations or refinance the loan. As previously noted, current economic conditions in the residential real estate markets and the mortgage finance markets have made it more difficult for borrowers to refinance their mortgages, which also increases our exposure to loss. Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future. At June 30, 2010, December 31, 2009 and December 31, 2008, our consolidated nonperforming loans totaled $386.5 million, $331.0 million and $287.4 million, or 10.83%, 8.53% and 6.44% of our loan portfolio, respectively. At June 30, 2010, December 31, 2009 and December 31, 2008, our consolidated nonperforming assets (which include nonperforming loans and foreclosed real estate) were $444.6 million, $379.7 million and $307.9 million, or 9.55%, 7.88% and 6.39% of our total assets, respectively. In addition, BankAtlantic had, approximately $43.4 million, $72.9 million and $95.3 million in accruing loans that were 30-89 days delinquent at June 30, 2010, December 31, 2009 and December 31, 2008, respectively. Our nonperforming assets adversely affect our net income in various ways. Until economic and real estate market conditions improve, particularly in Florida, but also nationally, we expect to continue to incur additional losses relating to an increase in nonperforming loans and nonperforming assets. We do not accrue interest income on nonperforming loans or real estate owned. When we receive the collateral in foreclosures or similar proceedings, we are required to mark the related collateral to the then fair market value, which is generally based on appraisals of the property obtained by us at that time. Accordingly, we may incur additional losses if property values decrease and the fair market value of the collateral we receive is determined to be less than the carrying amount reflected on our balance sheets (which is based on the estimated fair market value of the collateral as of the applicable balance sheet date). These loans and real estate owned also increase our risk profile, and increases in the level of nonperforming loans and nonperforming assets could impact our regulators view of appropriate capital levels in light of such risks. While we seek to manage our problem assets through loan sales, workouts, restructurings and other alternatives, decreases in the value of these assets, or the underlying collateral, or in these borrowers performance or financial conditions, which is often impacted by economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant Table of Contents commitments of time from management, which can be detrimental to the performance of their other responsibilities. Changes in interest rates could adversely affect our net interest income and profitability. The majority of BankAtlantic s assets and liabilities are monetary in nature. As a result, the earnings and growth of BankAtlantic are significantly affected by interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, events in the capital markets and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board. The nature and timing of any changes in such policies or general economic conditions and their effect on BankAtlantic cannot be controlled and are extremely difficult to predict. Changes in interest rates can impact BankAtlantic s net interest income as well as the valuation of its assets and liabilities. Banking is an industry that depends to a large extent on its net interest income. Net interest income is the difference between: interest income on interest-earning assets, such as loans; and interest expense on interest-bearing liabilities, such as deposits. Changes in interest rates can have differing effects on BankAtlantic s net interest income. In particular, changes in market interest rates, changes in the relationships between short-term and long-term market interest rates, or the yield curve, or changes in the relationships between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income and therefore reduce BankAtlantic s net interest income. While BankAtlantic attempts to structure its asset and liability management strategies to mitigate the impact of changes in market interest rates on net interest income, it may not be successful. Loan and mortgage-backed securities prepayment decisions are also affected by interest rates. Loan and securities prepayments generally accelerate as interest rates fall. Prepayments in a declining interest rate environment reduce BankAtlantic s net interest income and adversely affect its earnings because: it amortizes premiums on acquired loans and securities, and if loans or securities are prepaid, the unamortized premium will be charged off; and the yields it earns on the investment of funds that it receives from prepaid loans and securities are generally less than the yields that it earned on the prepaid loans. Significant loan prepayments in BankAtlantic s mortgage and investment portfolios in the future could have an adverse effect on BankAtlantic s earnings as proceeds from the repayment of loans may be reinvested in loans with lower interest rates. Additionally, increased prepayments associated with purchased residential loans may result in increased amortization of premiums on acquired loans, which would reduce BankAtlantic s interest income. In a rising interest rate environment, loan and securities prepayments generally decline, resulting in yields that are less than the current market yields. In addition, the credit risks of loans with adjustable rate mortgages may worsen as interest rates rise and debt service obligations increase. If BankAtlantic is not able to effectively and timely respond to changes in the interest rate environment, then our earnings could be adversely impacted. BankAtlantic historically obtained a significant portion of its non-interest income through service charges on core deposit accounts, and recently implemented legislation is designed to limit such service charges. BankAtlantic s deposit account growth has generated a substantial amount of service charge income. The largest component of this service charge income historically has been overdraft fees. Changes in banking regulations, in particular the Federal Reserve s new rules prohibiting banks from automatically enrolling customers in overdraft protection programs which became effective July 1, 2010, is expected to have a Table of Contents significant adverse impact on our service charge income and overall results. Additionally, changes in customer behavior as well as increased competition from other financial institutions could result in declines in deposit accounts or in overdraft frequency, resulting in a decline in service charge income. Further, the downturn in the Florida economy could result in the inability to collect overdraft fees. A reduction in deposit account fee income could have an adverse impact on our earnings. The cost and outcome of pending legal proceedings may impact our results of operations. We and our subsidiaries, including BankAtlantic and its subsidiaries, are currently parties in ongoing litigation and legal proceedings which have resulted in a significant increase in non-interest expense relating to legal and other professional fees. Pending proceedings include class action securities litigation and a SEC investigation, as well as litigation arising out of our banking operations, including workouts and foreclosures, potential class actions by customers relating to their accounts and service and overdraft fees and legal proceedings associated with our tax certificate business and relationships with third party tax certificate ventures. While we believe that we have meritorious defenses in these proceedings and that the outcomes should not materially impact us, we anticipate continued elevated legal and related costs as parties to the actions and the ultimate outcomes of the matters are uncertain. BankAtlantic has significantly reduced operating expenses over the past three years and BankAtlantic may not be able to continue to reduce expenses without adversely impacting its operations. BankAtlantic s operating expenses have declined from $313.9 million for the year ended December 31, 2007 to $258.8 million for the year ended December 31, 2009. BankAtlantic s operating expenses were $112.2 million for the six months ended June 30, 2010. Beginning in 2007, BankAtlantic reorganized its operations and significantly reduced operating expenses while focusing on its core businesses and seeking to maintain quality customer service. While management is focused on reducing overall expenses, BankAtlantic s inability to reduce or maintain its current expense structure may have an adverse impact on our results. Deposit insurance premium assessments may increase substantially, which would adversely affect expenses. BankAtlantic s FDIC deposit insurance expense was $11.0 million for the year ended December 31, 2009. In September 2009, the FDIC issued a rule requiring institutions to prepay their insurance premiums for all of 2010, 2011 and 2012, and increased annual insurance rates uniformly by three basis points in 2011. BankAtlantic s prepaid insurance assessment was $28.4 million at June 30, 2010. If the economy worsens and the number of bank failures significantly increases or if the FDIC otherwise determines that action is necessary, BankAtlantic may be required to pay additional FDIC specific assessments or incur increased annual insurance rates which would increase our expenses and adversely impact our results. Reductions in BankAtlantic s assets have had, and may continue to have, an adverse effect on our earnings and operations. BankAtlantic has reduced its assets and repaid borrowings in order to improve its liquidity and regulatory capital ratios. The reduction of earning asset balances has reduced our net interest income. Our net interest income was $193.6 million for the year ended December 31, 2008, $163.3 million for the year ended December 31, 2009 and $76.5 million for the six months ended June 30, 2010. The reduction in net interest income from earning asset reductions has previously been offset by lower operating expenses in prior periods. Our ability to further reduce expenses without adversely affecting our operations may be limited and, as a result, further reductions in our earning asset balances in future periods may adversely affect our earnings and/or operations. Table of Contents Adverse market conditions have affected and may continue to affect the financial services industry as well as our business and results of operations. Our financial condition and results of operations have been, and may continue to be, adversely impacted as a result of the downturn in the U.S. housing market and general economic conditions. Dramatic declines in the national and, in particular, Florida housing markets over the past three years, with falling home prices and increasing foreclosures and unemployment, have negatively impacted the credit performance of our loans and resulted in significant asset impairments at all financial institutions, including government-sponsored entities, major commercial and investment banks, and regional and community financial institutions, including BankAtlantic. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The continuing economic pressure on consumers and lack of confidence in the financial markets has adversely affected and may continue to adversely affect our business, financial condition and results of operations. Further negative market and economic developments may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provisions for loan losses. Continuing economic deterioration that affects household and/or corporate incomes could also result in reduced demand for credit or fee-based products and services. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on BankAtlantic and others in the financial services industry. In particular, we may face the following risks in connection with these events: BankAtlantic s borrowers may be unable to make timely repayments of their loans, or the value of real estate collateral securing the payment of such loans may continue to decrease, which could result in increased delinquencies, foreclosures and customer bankruptcies, any of which would increase levels of non-performing loans resulting in significant credit losses and increased expenses and could have a material adverse effect on our operating results. Further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions or government entities. Increased regulation of the industry may increase costs, decrease fee income and limit BankAtlantic s activities and operations. Increased competition among financial services companies based on the recent consolidation of competing financial institutions and the conversion of investment banks into bank holding companies may adversely affect BankAtlantic s ability to competitively market its products and services. BankAtlantic may be required to pay significantly higher FDIC deposit premiums and assessments. Continued asset valuation declines could adversely impact our credit losses and result in additional impairments of goodwill and other assets. Legislative and regulatory actions taken now or in the future may have a significant adverse effect on our financial statements. During 2008 and 2009, the U.S. Treasury implemented various initiatives in response to the financial crises affecting the banking system and financial markets. These initiatives included the U.S. Treasury s Capital Purchase Program (the CPP ). Bancorp and BankAtlantic submitted applications to the U.S. Treasury for CPP funds during the fourth quarter of 2008. We were advised that the U.S. Treasury was assessing our eligibility to participate in the CPP due to our multiple tier holding company structure and we were uncertain as to the impact our decision to defer quarterly interest payments on our outstanding TruPS would have on our applications. Bancorp instead decided to pursue other capital raising transactions and completed a rights offering in September 2009, which resulted in net proceeds to Bancorp of approximately $76 million. Based on the success of the rights offering, we withdrew our applications for CPP funds in September 2009. Table of Contents Other initiatives implemented by the U.S. Treasury included the guarantee of certain financial institution indebtedness, purchasing certain legacy loans and assets from financial institutions, the purchase of mortgage securitizations, homeowner relief that encourages loan restructuring and modification, the establishment of significant liquidity and credit facilities for financial institutions and investment banks, the lowering of the federal funds rate, emergency action against short selling practices, a temporary guaranty program for money market funds, the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers, coordinated international efforts to address illiquidity and other weaknesses in the banking sector and other programs being developed. The actual impact that the initiatives that have been adopted or may be adopted in the future will have on the financial markets is uncertain. The initiatives could have a material and adverse affect on BankAtlantic s business, financial condition, results of operations and access to credit. Further, on July 21, 2010, President Obama signed the Dodd-Frank Act into law. The law includes, among other things: the creation of a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; the elimination of the Office of Thrift Supervision and the transfer of oversight of federally chartered thrift institutions to the Office of the Comptroller of the Currency (the OCC ); limitations on a bank s investments in proprietary trading to no more than three percent of its Tier 1 capital and limits its aggregate investment in any and all hedge funds and private equity funds to no more than three percent of its Tier 1 capital, subject to certain exceptions, limits and implementing rules, which are required to be issued by the federal financial regulators within 15 months of the enactment of the Dodd-Frank Act; the creation of a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies; the establishment of strengthened capital and prudential standards for banks and bank holding companies; enhanced regulation of financial markets, including derivatives and securitization markets; the elimination of certain trading activities from banks; a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000; and the creation of an Office of National Insurance within Treasury. While the bill has been signed into law, a number of provisions of the law remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but we believe that certain aspects of the new legislation, including, without limitation, the requirement of strengthened capital standards for holding companies and the costs of compliance with disclosure and reporting requirements and examinations by the new Consumer Financial Protection Agency, could have a significant impact on our business, financial condition and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. In addition, in June 2010, the Federal Reserve, OCC, OTS and FDIC issued final guidance on incentive compensation policies. There have also been recent proposals to limit a lender s ability to foreclose on mortgages or make foreclosures less economically viable, including by allowing Chapter 13 bankruptcy plans to cram down the value of certain mortgages on a consumer s principal residence to its market value and/or reset interest rates and monthly payments to permit defaulting debtors to remain in their home. Table of Contents Because the regulatory changes are so recent, we do not know how the agencies will interpret and enforce the recently released guidance and legislation. These changes or any future changes, if enacted or adopted, may impact our business activities, require us to raise additional capital, change certain of our business practices or materially change our business model, and could expose us to additional costs (including increased compliance costs). These changes may also require us to invest significant management attention and resources to make any necessary changes, and could therefore also adversely affect our business and operations. The actual impact on banks and the financial markets of initiatives that have been adopted or may be adopted in the future is uncertain. These government initiatives could potentially have a material and adverse affect on BankAtlantic s business, financial condition, results of operations and access to credit. We and BankAtlantic are each subject to significant regulation, and our activities and the activities of our subsidiaries, including BankAtlantic, are subject to regulatory requirements that could have a material adverse effect on our business. The banking industry is an industry subject to multiple layers of regulation. Failure to comply with any of these regulations can result in substantial penalties, significant restrictions on business activities and growth plans and/or limitations on dividend payments. As a holding company, we are also subject to significant regulation. Changes in the regulation or capital requirements associated with holding companies generally or with us in particular could also have a material adverse impact on our business and operating results. We are a grandfathered unitary savings and loan holding company and have broad authority to engage in various types of business activities. The OTS can prevent us from engaging in activities or limit those activities if it determines that there is reasonable cause to believe that the continuation of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of BankAtlantic. The OTS can also: prohibit the payment of dividends by BankAtlantic to us; limit transactions between us, BankAtlantic and our and BankAtlantic s subsidiaries or affiliates; limit our and BankAtlantic s activities; or impose capital requirements on us or additional capital requirements on BankAtlantic. Unlike bank holding companies, as a unitary savings and loan holding company, we have not historically been subject to capital requirements. However, as described above, capital requirements may be imposed on savings and loan holding companies in the future. The Dodd-Frank Act may, among other things, eliminate the status of a savings and loan holding company and require us to register as a bank holding company, which would subject us to regulatory capital requirements. Further, the regulatory bodies having authority over us may adopt regulations in the future that would affect our operations, including our ability to pay dividends or to engage in certain transactions or activities. BankAtlantic is subject to liquidity risk as its loans are funded by its deposits. Like all financial institutions, BankAtlantic s assets are primarily funded through its customer deposits, and changes in interest rates, availability of alternative investment opportunities, a loss of confidence in financial institutions in general or BankAtlantic in particular, and other factors may make deposit gathering more difficult. If BankAtlantic experiences decreases in deposit levels, it may need to increase its borrowings or liquidate a portion of its assets which may not be readily saleable. Additionally, interest rate changes or further disruptions in the capital markets may make the terms of borrowings and deposits less favorable. Our loan portfolio subjects us to high levels of credit and counterparty risk. We are exposed to the risk that our borrowers or counter-parties may default on their obligations. Credit risk arises through the extension of loans, certain securities, letters of credit, and financial guarantees and through counter-party exposure on trading and wholesale loan transactions. In an attempt to manage this risk, Table of Contents we seek to establish policies and procedures to manage both on and off-balance sheet (primarily loan commitments) credit risk. BankAtlantic reviews the creditworthiness of individual borrowers or counter-parties, and limits are established for the total credit exposure to any one borrower or counter-party; however, such limits may not have the effect of adequately limiting credit exposure. In addition, when deciding whether to extend credit or enter into other transactions with customers and counterparties, we often rely on information furnished to us by such customers and counterparties, including financial statements and other financial information, and representations of the customers and counterparties that relates to the accuracy and completeness of the information. While we take all actions we deem necessary to ensure the accuracy of the information provided to us, there is a risk that the information provided to us may not be accurate or we may not successfully identify all information needed to fully assess the risk, which may expose us to increased credit risk and counterparty risk. BankAtlantic also enters into participation agreements with or acquires participation interests from other lenders to limit its credit risk, but will continue to be subject to risks with respect to its interest in the loan, as well as not being in a position to make independent determinations with respect to its interest. Further, the majority of BankAtlantic s residential loans are serviced by others. The servicing agreements may restrict BankAtlantic s ability to initiate work-out and modification arrangements with borrowers which could adversely impact BankAtlantic s ability to minimize losses on non-performing loans. We are also exposed to credit and counterparty risks with respect to loans held in our asset workout subsidiary. Provisions in our charter documents, as well as the shareholder rights plan which we may adopt, may make it difficult for a third party to acquire us and could depress the price of our Class A Common Stock. Our Restated Articles of Incorporation and Amended and Restated Bylaws contain provisions that could delay, defer or prevent a change of control of us or our management. These provisions could make it more difficult for shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our Class A Common Stock. These provisions include: the provisions in our Restated Articles of Incorporation regarding the voting rights of our Class B Common Stock; the authority of our board of directors to issue additional shares of common or preferred stock and to fix the relative rights and preferences of the preferred stock without additional shareholder approval; the division of our board of directors into three classes of directors with three-year staggered terms; and advance notice procedures to be complied with by shareholders in order to make shareholder proposals or nominate directors. In addition, we may adopt a shareholder rights plan aimed at preserving our ability to utilize our available net operating losses to offset future taxable income. The shareholder rights plan would be designed with a goal of preventing an ownership change for purposes of Section 382 of the Internal Revenue Code (the Code ). The shareholder rights plan, if triggered, would cause substantial dilution to any person or group that acquires 5% or more of the outstanding shares of our Class A Common Stock or owns 5% or more of the outstanding shares of our Class A Common Stock and thereafter acquires any additional shares of our Class A Common Stock without our approval. Although the consideration of adopting the shareholder rights plan is not in response to any effort to acquire control of us, the shareholder rights plan, if adopted, would make it more difficult for a third party to acquire a controlling position in our common stock without our approval. Table of Contents Our ability to utilize our available net operating losses to offset future taxable income may be jeopardized or limited in the future. Our financial condition may be materially and adversely impacted if our ability to utilize our available net operating losses to offset future taxable income is jeopardized or limited in the future. While, as described above, we may adopt a shareholder rights plan aimed at preserving our ability to utilize our available net operating losses, we may not ultimately adopt such a shareholder rights plan and, if adopted, it may not be implemented in all instances so as to successfully protect against any limitation on our ability to utilize our available net operating losses. Risks Related to Our Class A Common Stock and this Offering The market price of our Class A Common Stock may decrease following this offering. We are currently offering for sale shares of our Class A Common Stock ( shares of Class A Common Stock if the underwriters exercise their over-allotment option in full). The possibility that substantial amounts of shares of our Class A Common Stock may be sold in the public market may cause prevailing market prices for our Class A Common Stock to decrease. Additionally, because stock prices generally fluctuate over time, purchasers of Class A Common Stock in the offering may not be able to sell shares after the offering at a price equal to or greater than the actual purchase price. Broad market and industry factors may materially reduce the market price of our Class A Common Stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A Common Stock is low. Purchasers should consider these factors in determining whether to purchase shares of Class A Common Stock and the timing of any sale of shares of Class A Common Stock. We are controlled by BFC, and BFC s control position may adversely affect the market price of our Class A Common Stock. As of October 5, 2010, BFC owned all of our issued and outstanding Class B Common Stock and 27,333,428 shares, or approximately 44%, of our issued and outstanding Class A Common Stock. BFC s holdings represent approximately 71% of our total voting power. Additionally, Alan B. Levan, our Chairman and Chief Executive Officer, and John E. Abdo, our Vice Chairman, beneficially own shares of BFC s Class A and Class B common stock representing approximately 72% of BFC s total voting power. Our Class A Common Stock and Class B Common Stock vote as a single group on most matters. Accordingly, BFC, directly, and Messrs. Levan and Abdo, indirectly through BFC, are in a position to control us, elect our Board of Directors and significantly influence the outcome of any shareholder vote, except in those limited circumstances where Florida law mandates that the holders of our Class A Common Stock vote as a separate class. This control position may have an adverse effect on the market price of our Class A Common Stock. BFC can reduce its economic interest in us and still maintain voting control. Our Class A Common Stock and Class B Common Stock generally vote together as a single class, with our Class A Common Stock possessing a fixed 53% of the aggregate voting power of all of our common stock and our Class B Common Stock possessing a fixed 47% of such aggregate voting power. Our Class B Common Stock currently represents approximately 2% of our common equity and 47% of our total voting power. As a result, the voting power of our Class B Common Stock does not bear a direct relationship to the economic interest represented by the shares. The issuance of shares of our Class A Common Stock in this offering will further dilute the relative economic interest of our Class B Common Stock, but will not decrease the voting power represented by our Class B Common Stock. Further, our Restated Articles of Incorporation provide that these relative voting percentages will remain fixed until such time as BFC and its affiliates own less than 487,613 shares of our Class B Common Stock, which is approximately 50% of the number of shares of our Class B Common Stock that BFC now owns, even if additional shares of our Class A Common Stock are issued. Therefore, BFC may sell up to approximately 50% of its shares of our Class B Common Stock (after converting those shares to Class A Common Stock), and significantly reduce its economic interest in us, while still maintaining its voting power. If BFC were to take this action, it would widen the disparity between Table of Contents the equity interest represented by our Class B Common Stock and its voting power. Any conversion of shares of our Class B Common Stock into shares of our Class A Common Stock in connection with the sale would further dilute the voting interests of the holders of our Class A Common Stock. Future offerings of equity or debt securities may adversely affect the price of our Class A Common Stock. In the future, we may offer and sell securities, including shares of Class A Common Stock or securities convertible into or exchangeable for our Class A Common Stock, through future equity offerings or otherwise. We could also pursue these financings at the Bancorp parent company level or directly at BankAtlantic or both. Issuances of equity directly at BankAtlantic would dilute our interest in BankAtlantic. Future issuances of our Class A Common Stock may dilute the interests of our current shareholders. Preferred stock, if issued, may have a preference on dividend payments that would limit our ability to make a dividend distribution to the holders of our Class A Common Stock. Additionally, upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A Common Stock. In February 2010, we filed a registration statement with the SEC registering to offer, from time to time, up to $75 million of Class A Common Stock, preferred stock, subscription rights, warrants or debt securities. In July 2010, we completed a $20 million rights offering to our shareholders and issued an aggregate of 13,340,379 shares of Class A Common Stock. We currently have approximately $55 million remaining on our shelf registration statement. We are conducting this offering of $125 million of our Class A Common Stock on Form S-1 rather than pursuant to our shelf registration statement because this offering amount exceeds the remaining availability under our shelf registration statement. However, we may use our existing shelf registration statement to conduct future offerings that do not exceed the remaining availability. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our shareholders bear the risk of future offerings at the Bancorp parent company level reducing the price of our Class A Common Stock and future offerings directly at BankAtlantic diluting our interest in BankAtlantic. We have broad discretion in the use of the net proceeds from this offering and may not use them effectively, which could adversely affect our results of operations and cause our Class A Common Stock price to decline. We will have broad discretion in determining how the proceeds of this offering will be used. While our board of directors believes that flexibility in application of the net proceeds is prudent, the broad discretion it affords entails increased risks to the investors in this offering. Investors in this offering have no current basis to evaluate the possible merits or risks of any application of the net proceeds of this offering. Our shareholders may not agree with the manner in which we choose to allocate and spend the net proceeds. A failure to apply the net proceeds of this offering effectively could have a material adverse effect on our business and/or cause the market price of our Class A Common Stock to decline. There are regulatory limitations on the number of shares you may purchase in this offering. Because we are a unitary savings and loan holding company, the OTS has the authority to, among other things, prevent individuals and entities from acquiring control of us. Under the applicable rules and regulations of the OTS, if, after giving effect to the number of shares of our Class A Common Stock you purchase, you, directly or indirectly, or through one or more subsidiaries, or acting in concert with one or more other persons or entities, will own (i) more than 10% of our Class A Common Stock and one or more specified control factors exist, then you will be determined, subject to your right of rebuttal, to have acquired control of us or (ii) more than 25% of our Class A Common Stock, then you will be conclusively determined to have acquired control of us, regardless of whether any control factors exist. Accordingly, subject to certain limited exceptions, you will be required to rebut such determination of control or obtain the approval of the OTS relating to such acquisition of control, as the case may be, prior to acquiring the number of shares of our Class A Common Stock in this offering which would cause your ownership of our Class A Common Stock to exceed either of the thresholds set forth above. We will not be required to issue to you shares of our Class A Table of Contents Common Stock until you obtain all required clearances and approvals, including, without limitation, the approval of the OTS, to own or control such shares. You are urged to consult with your own legal counsel regarding whether to seek the prior approval of the OTS in connection with your purchase of shares of Class A Common Stock in this offering. Table of Contents

parsed_sections/risk_factors/2010/CIK0000922863_quality_risk_factors.txt ADDED Viewed

The diff for this file is too large to render. See raw diff

parsed_sections/risk_factors/2010/CIK0000923151_truck_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Our business, operations and financial condition are subject to various risks. The market or trading price of our securities could decline due to any of these risks. In addition, please read Forward-Looking Statements in this prospectus, where we describe additional uncertainties associated with our business and the forward-looking statements included or incorporated by reference in this prospectus. Risks Related to Our Business and Industry Current economic conditions, including those related to the credit markets and the commercial vehicle industry, may have a material adverse effect on our business, results of operations or financial condition. Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in most major economies continuing into 2010. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for Western and emerging economies. Furthermore, the commercial vehicle supply industry in which we operate has traditionally been highly competitive and cyclical, and, as a result, has experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. Accordingly, the current general economic conditions have resulted in a severe downturn in the commercial vehicle supply industry resulting in a significant decline in our sales volume and necessitating our Chapter 11 bankruptcy filing in October 2009. We cannot accurately predict how prolonged this downturn may be. These economic conditions may impact our business in a number of ways, including: Limited Access to Capital Markets. As a result of these overall market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may affect our ability to refinance maturing liabilities and access the capital markets to meet our liquidity needs. Availability of Trade Credit. We currently maintain trade credit with certain of our key suppliers and utilize such credit to purchase significant amounts of raw materials and other supplies with payment terms. As conditions in the commercial vehicle supply industry have become less favorable, key suppliers have been seeking to shorten trade credit terms or to require cash in advance for payment. If a significant number of our key suppliers were to shorten or eliminate our trade credit, our inability to finance large purchases of our key supplies and raw materials would increase our costs and negatively impact our liquidity and cash flow. Lower Sales Uncertainty. Current and future economic conditions may cause our customers to defer purchases or our customers may be unable to obtain sufficient credit to finance purchases of our products and meet their payment obligations to us. Certain of our customers may also need us to extend additional credit commitments. A continuation of the current credit crisis could require us to make difficult decisions between increasing our level of customer financing or potentially losing sales to these customers. Delaware 3714 61-1109077 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 7140 Office Circle Evansville, Indiana 47715 (812) 962-5000 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Stephen A. Martin, Esq. Vice President / General Counsel Accuride Corporation 7140 Office Circle Evansville, Indiana 47715 (812) 962-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) with copies to: Christopher D. Lueking, Esq. Latham & Watkins LLP 233 South Wacker Drive, Suite 5800 Chicago, Illinois 60606 (312) 876-7700 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerate filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o (Do not check if a smaller reporting company) CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price per Share Proposed Maximum Aggregate Offering Price Amount of Registration Fee 7.5% Senior Convertible Notes $ 174,604,997 (1) 100%(2) $ 174,604,997 (2)(3) $ 12,450 Common Stock, $0.01 par value $ 383,974,333 (4) $ 1.27(5) $ 39,255,796 (5) $ 2,799 Senior Guarantees (6) Total $ 213,860,793 $ 15,2,49 (7) (1) Includes notes issuable as paid-in-kind interest through February 26, 2013. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (3) Equals the aggregate principal amount of notes being registered. (4) Represents (a) the maximum number of shares of common stock issuable upon conversion of the notes registered hereby at a maximum conversion rate of 2,022.0742 shares of common stock for each $1,000 principal amount of notes (including shares issuable upon the conversion of notes issued as paid-in-kind interest), which is 353,064,258 shares, (b) 28,907,745 shares of common stock issued upon our emergence from bankruptcy (i) to certain entities as payment of a backstop fee in connection with the offering of the notes or (ii) in exchange for our prepetition securities, and (c) the maximum number of shares of common stock issuable upon exercise of certain warrants issued upon our emergence from bankruptcy held by certain selling securityholders, which is 2,002,330 shares. Pursuant to Rule 416 under the Securities Act, the registrants are also registering such indeterminate number of shares of common stock as may be issued from time to time upon conversion of the notes as a result of the anti-dilution provisions applicable to stock splits, stock dividends and similar transactions. (5) Estimated solely for the purpose of calculating the registration fee payable in connection with the 30,910,075 shares of common stock described in clauses (b) and (c) of the paragraph above. The calculations of the proposed maximum offering price per share and the proposed maximum aggregate offering price are based on the average high and low sale prices of our common stock as quoted on the OTC Bulletin Board on August 6, 2010. No additional consideration will be received for the 353,064,258 shares of common stock issuable upon conversion of the notes, and therefore no registration fee is required pursuant to Rule 457(i) under the Securities Act. (6) The notes are guaranteed by the guarantors named in the table of Additional Co-Registrants. No separate consideration will be paid in respect of the guarantees pursuant to Rule 457(n) of the Securities Act. (7) Registration fees of $15,249 were previously paid in connection with the previous filings of this registration statement on May 26, 2010 and July 7, 2010. The registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Reduced Pricing. Any continued reduction in consumer and commercial spending and competitive threats may drive us to reduce product pricing, which would have a negative impact on gross profit. Moreover, reduced revenues as a result of a softening of the economy may also reduce our working capital and interfere with our short term and long term strategies. The risks outlined above could have a material adverse effect on our business, results of operations or financial condition. We rely on, and make significant operational decisions based in part upon, industry data and forecasts that may prove to be inaccurate. We continue to operate in a challenging economic environment and our ability to maintain liquidity may be affected by economic or other conditions that are beyond our control and which are difficult to predict. The 2010 production forecasts by ACT Publications for the significant commercial vehicle markets that we serve, as of July 10, 2010, are as follows: North American Class 8 149,601 North American Classes 5-7 109,307 U.S. Trailers 107,450 Based on the these production builds, we expect that our liquidity will be sufficient to fund currently anticipated working capital, capital expenditures, and debt service requirements for at least the next twelve months. However, if our net sales are significantly less than expectations, given the volatility and the calendarization of the production builds as well as the other markets that we serve, or due to the challenging credit markets, we could have insufficient liquidity, which could have a material adverse effect on our business, results of operations or financial condition. The failure to realize cost savings under our cost restructuring plan could adversely affect our business. During 2008 and 2009, and continuing into 2010, we implemented various cost reduction initiatives in response to, among other things, significant downturns in our industry. These initiatives have included aligning our workforce in response to slowdowns in the industry and consolidating certain of our facilities. We have recorded pre-tax restructuring expenses to cover costs associated with our cost reduction initiatives. We cannot assure you that these cost reduction initiatives will sufficiently help in returning us to profitability. Because our restructuring activities involve changes to many aspects of our business, the cost reductions could adversely impact productivity and sales to an extent we have not anticipated. Even if these activities generate the anticipated cost savings, there may be other unforeseeable and unintended factors or consequences that could adversely impact our profitability and business, including unintended employee attrition. We have experienced significant historical, and may experience significant future, operating losses and net income losses which may hinder our ability to meet our debt service or working capital requirements. As of March 31, 2010, the Company had a stockholders deficiency of $3.6 million. The Company had operating income of $29.6 million in 2007 and operating losses of $276.6 million in 2008 and $65.1 million in 2009 and net income loss of $8.6 million in 2007, $328.3 million in 2008 and $140.1 million in 2009. During the three months ended March 31, 2010, the Company recognized net income of $59.3 million related to reorganization items. Even with the reduction in indebtedness through our recent reorganization under Chapter 11, future losses may continue. We cannot assure you that we will recognize net income in future periods. If we cannot generate net income or sufficient operating profitability, we may not be able to meet our debt service or working capital requirements. We are dependent on sales to a small number of our major customers and on our status as standard supplier on certain truck platforms of each of our major customers. Table of Contents Table of Additional Co-Registrants Exact Name as specified in its charter State or other jurisdiction of incorporation or organization I.R.S. Employer Identification No. Accuride Cuyahoga Falls, Inc. Delaware 39-1949556 Accuride Distributing, LLC Delaware 26-2493124 Accuride EMI, LLC Delaware N/A Accuride Erie L.P. Delaware 76-0534862 Accuride Henderson Limited Liability Company Delaware 61-1318596 AOT Inc. Delaware 34-1683088 AKW General Partner L.L.C. Delaware 76-0534861 Bostrom Holdings, Inc. Delaware 36-4129282 Bostrom Seating, Inc. Delaware 39-1507179 Bostrom Specialty Seating, Inc. Delaware 36-4264182 Brillion Iron Works, Inc. Delaware 39-1506942 Erie Land Holding, Inc. Delaware 20-2218018 Fabco Automotive Corporation Delaware 13-3369802 Gunite Corporation Delaware 13-3369803 Imperial Group Holding Corp. 1 Delaware 36-4284007 Imperial Group Holding Corp. 2 Delaware 36-4284009 Imperial Group, L.P. Delaware 36-4284012 JAII Management Company Delaware N/A Transportation Technologies Industries, Inc. Delaware 25-3535407 Truck Components Inc. Delaware 36-3535407 Table of Contents Sales, including aftermarket sales, to Navistar, Inc., which we refer to as Navistar, PACCAR, Inc., which we refer to as PACCAR, Daimler Truck North America, which we refer to as DTNA, and Volvo Truck Corporation, which we refer to as Volvo/Mack, constituted approximately 19%, 16%, 14%, and 7%, respectively, of our 2009 net sales. No other customer accounted for more than 5% of our net sales for this period. The loss of any significant portion of sales to any of our major customers would likely have a material adverse effect on our business, results of operations or financial condition. We are a standard supplier of various components at a majority of our major customers, which results in recurring revenue as our standard components are installed on most trucks ordered from that platform, unless the end user specifically requests a different product, generally at an additional charge. The selection of one of our products as a standard component may also create a steady demand for that product in the aftermarket. We may not maintain our current standard supplier positions in the future, and may not become the standard supplier for additional truck platforms. The loss of a significant standard supplier position or a significant number of standard supplier positions with a major customer could have a material adverse effect on our business, results of operations or financial condition. We are continuing to engage in efforts intended to improve and expand our relations with each of Navistar, PACCAR, DTNA and Volvo/Mack. We have supported our position with these customers through direct and active contact with end users, trucking fleets, and dealers, and have located certain of our marketing personnel in offices near these customers and most of our other major customers. We may not be able to successfully maintain or improve our customer relationships so that these customers will continue to do business with us as they have in the past or be able to supply these customers or any of our other customers at current levels. The loss of a significant portion of our sales to Navistar, PACCAR, DTNA or Volvo/Mack could have a material adverse effect on our business, results of operations or financial condition. In addition, the delay or cancellation of material orders from, or problems at, Navistar, PACCAR, DTNA or Volvo/Mack, or any of our other major customers could have a material adverse effect on our business, results of operations or financial condition. Increased cost or reduced supply of raw materials and purchased components may adversely affect our business, results of operations or financial condition. Our business is subject to the risk of price increases and fluctuations and periodic delays in the delivery of raw materials and purchased components that are beyond our control. Our operations require substantial amounts of raw steel, aluminum, steel scrap, pig iron, electricity, coke, natural gas, sheet and formed steel, bearings, purchased components, fasteners, foam, fabrics, silicon sand, binders, sand additives, coated sand, and tube steel. Fluctuations in the delivery of these materials may be driven by the supply/demand relationship for material, factors particular to that material or governmental regulation for raw materials such as electricity and natural gas. In addition, if any of our suppliers seeks bankruptcy relief or otherwise cannot continue its business as anticipated or we cannot renew our supply contracts on favorable terms, the availability or price of raw materials could be adversely affected. Fluctuations in prices and/or availability of the raw materials or purchased components used by us, which at times may be more pronounced during periods of higher truck builds, may affect our profitability and, as a result, have a material adverse effect on our business, results of operations or financial condition. In addition, as described above, a shortening or elimination of our trade credit by our suppliers may affect our liquidity and cash flow and, as a result, have a material adverse effect on our business, results of operations or financial condition. We use substantial amounts of raw steel and aluminum in our production processes. Although raw steel is generally available from a number of sources, we have obtained favorable sourcing by negotiating and entering into high-volume contracts with third parties with terms ranging from one to two years. We obtain raw steel and aluminum from various third-party suppliers. We may not be successful in renewing our supply contracts on favorable terms or at all. A substantial interruption in the supply of raw steel or aluminum or inability to obtain a supply of raw steel or aluminum on commercially desirable terms could have a material adverse effect on our business, results of operations or financial condition. We are not always able, and may not be able in the future, to pass on increases in the price of raw steel or aluminum to our customers on a timely basis or at all. In particular, when raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass price increases through to our customers on a timely basis, if at all, which could adversely affect our operating margins and cash flow. Any fluctuations in the price or availability of raw steel or aluminum may have a material adverse effect on our business, results of operations or financial condition. Table of Contents The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission relating to these securities is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated August 10, 2010 PROSPECTUS Accuride Corporation $140,000,000 7.5% Senior Convertible Notes due 2020 Shares of Common Stock Table of Contents Steel scrap and pig iron are also major raw materials used in our business to produce our wheel-end and industrial components. Steel scrap is derived from, among other sources, junked automobiles, industrial scrap, railroad cars, agricultural and heavy machinery, and demolition steel scrap from obsolete structures, containers and machines. Pig iron is a low-grade cast iron that is a product of smelting iron ore with coke and limestone in a blast furnace. The availability and price of steel scrap and pig iron are subject to market forces largely beyond our control, including North American and international demand for steel scrap and pig iron, freight costs, speculation and foreign exchange rates. Steel scrap and pig iron availability and price may also be subject to governmental regulation. We are not always able, and may not be able in the future, to pass on increases in the price of steel scrap and pig iron to our customers. In particular, when raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass price increases through to our customers on a timely basis, if at all, which could have a material adverse effect on our operating margins and cash flow. Any fluctuations in the price or availability of steel scrap or pig iron may have a material adverse effect on our business, results of operations or financial condition. Our business is affected by the seasonality and regulatory nature of the industries and markets that we serve. Our operations are typically seasonal as a result of regular customer maintenance and model changeover shutdowns, which typically occur in the third and fourth quarter of each calendar year. This seasonality may result in decreased net sales and profitability during the third and fourth fiscal quarters and have a material adverse effect on our business, results of operations or financial condition. In addition, federal and state regulations (including engine emissions regulations, tariffs, import regulations and other taxes) may have a material adverse effect on our business and are beyond our control. Cost reduction and quality improvement initiatives by OEMs could have a material adverse effect on our business, results of operations or financial condition. We are primarily a components supplier to the heavy- and medium-duty truck industries, which are characterized by a small number of OEMs that are able to exert considerable pressure on components suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. Given the fragmented nature of the industry, OEMs continue to demand and receive price reductions and measurable increases in quality through their use of competitive selection processes, rating programs, and various other arrangements. We may be unable to generate sufficient production cost savings in the future to offset such price reductions. OEMs may also seek to save costs by relocating production to countries with lower cost structures, which could in turn lead them to purchase components from local suppliers with lower production costs. Additionally, OEMs have generally required component suppliers to provide more design engineering input at earlier stages of the product development process, the costs of which have, in some cases, been absorbed by the suppliers. Future price reductions, increased quality standards and additional engineering capabilities required by OEMs may reduce our profitability and have a material adverse effect on our business, results of operations or financial condition. We operate in highly competitive markets. The markets in which we operate are highly competitive. We compete with a number of other manufacturers and distributors that produce and sell similar products. Our products primarily compete on the basis of price, manufacturing and distribution capability, product design, product quality, product delivery and product service. Some of our competitors are companies, or divisions, units or subsidiaries of companies that are larger and have greater financial and other resources than we do. For these reasons, our products may not be able to compete successfully with the products of our competitors. In addition, our competitors may foresee the course of market development more accurately than we do, develop products that are superior to our products, have the ability to produce similar products at a lower cost than we can, or adapt more quickly than we do to new technologies or evolving regulatory, industry, or customer requirements. As a result, our products may not be able to compete successfully with their products. In addition, OEMs may expand their internal production of components, shift sourcing to other suppliers, or take other actions that could reduce the market for our products and have a negative impact on our business. We may encounter increased competition in the future from existing competitors or new competitors. We expect these competitive pressures in our markets to remain strong. On February 26, 2010, upon our emergence from Chapter 11 bankruptcy proceedings and pursuant to the plan of reorganization confirmed by the bankruptcy court on February 18, 2010, which we refer to as the Plan of Reorganization, among other things, we issued (i) $140,000,000 aggregate principal amount of our 7.5% Senior Convertible Notes due 2020, which we refer to as the notes, (ii) shares of our postpetition common stock, which we refer to as common stock, in exchange for our prepetition 8.5% Senior Subordinated Notes due 2015, which we refer to as the old subordinated notes, and for our prepetition common stock, which we refer to as the old common stock, (iii) shares of our common stock to parties that backstopped the offering of the notes, whom we refer to as the backstop providers and (iv) warrants, which we refer to as the warrants, in exchange for our prepetition common stock. This prospectus will be used by selling securityholders to resell (a) the notes, (b) the common stock issuable upon conversion of the notes, (c) certain shares of common stock issued to the backstop providers, whether pursuant to the backstop or otherwise, on the effective date of the Plan of Reorganization, as described in clauses (ii) and (iii) of the preceding sentence and (d) the common stock issuable upon exercise of the warrants issued to certain backstop providers. We refer to the common stock being registered pursuant to clauses (c) and (d) of the preceding sentence as backstop provider common stock and to the common stock being registered pursuant to clauses (b), (c) and (d) of the preceding sentence collectively as registrable common stock. The notes will bear interest at a rate of 7.5% per annum and will mature on February 26, 2020. The first six interest payments will be paid-in-kind, which we refer to as PIK, interest. Thereafter, beginning on August 26, 2013, interest on the notes will be paid in cash. Holders may convert the notes at their option at any time prior to the close of business on the second trading day immediately preceding the maturity date at an initial conversion rate of 1,333.3333 shares of common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of $0.75 per share of common stock. The conversion rate is subject to adjustment in some events, including for dilution upon the payment of PIK interest. We will not receive any proceeds from the sale by the selling securityholders of the notes or the registrable common stock. Other than selling commissions and fees and stock transfer taxes, we will pay all expenses of the registration and sale of the notes and the registrable common stock. You should read this prospectus carefully before you invest in our securities. You should read this prospectus together with additional information described under the headings Where You Can Find More Information and Incorporation of Certain Documents by Reference before you make your investment decision. Our common stock is quoted on the OTC Bulletin Board, which we refer to as the OTCBB, under the symbol ACUZ. The last reported sale price of our common stock on the OTCBB on August 9, 2010 was $1.24 per share. Investing in shares of our common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks in Risk Factors on page 4 of this prospectus. The complete mailing address and telephone number of our principal executive offices is: Table of Contents In addition, potential competition from foreign truck components suppliers, especially in the aftermarket, may lead to an increase in truck components imports into North America, adversely affecting our market share and negatively affecting our ability to compete. At present, competition from non-U.S. manufacturers is constrained in the markets in which we compete due to factors such as high shipping costs. However, if the cost of fuel goes down, shipping costs would be significantly reduced, increasing the likelihood that foreign manufacturers will seek to increase their sales of truck components in North American markets. Foreign truck components suppliers, including those in China, may in the future increase their currently modest share of the markets for truck components in which we compete. Some of these foreign suppliers may be owned, controlled or subsidized by their governments, and their decisions with respect to production, sales and exports may be influenced more by political and economic policy considerations than by prevailing market conditions. In addition, foreign truck components suppliers may be subject to less restrictive regulatory and environmental regimes that could provide them with a cost advantage relative to North American suppliers. Therefore, there is a risk that some foreign suppliers, including those in China, may increase their sales of truck components in North American markets despite decreasing profit margins or losses. If future trade cases do not provide relief from such potential trade practices, U.S. protective trade laws are weakened or international demand for trucks and/or truck components decreases, an increase of truck component imports into the United States may occur, which could have a material adverse effect on our business, results of operations or financial condition. We face exposure to foreign business and operational risks, including foreign exchange rate fluctuations, and if we were to experience a substantial fluctuation, our profitability may change. In the normal course of doing business, we are exposed to risks associated with changes in foreign exchange rates, particularly with respect to the Canadian dollar. From time to time, we use forward foreign exchange contracts, and other derivative instruments, to help offset the impact of the variability in exchange rates on our operations, cash flows, assets and liabilities. We had no outstanding foreign exchange forward contract instruments open at March 31, 2010. Factors that could further impact the risks associated with changes in foreign exchange rates include the accuracy of our sales estimates, volatility of currency markets and the cost and availability of derivative instruments. In addition, changes in the laws or governmental policies in the countries in which we operate could have a material adverse effect on our business, results of operations or financial condition. We may not be able to continue to meet our customers demands for our products and services. We must continue to meet our customers demand for our products and services. However, we may not be successful in doing so. If our customers demand for our products and/or services exceeds our ability to meet that demand, we may be unable to continue to provide our customers with the products and/or services they require to meet their business needs. Factors that could result in our inability to meet customer demands include an unforeseen spike in demand for our products and/or services, a failure by one or more of our suppliers to supply us with the raw materials and other resources that we need to operate our business effectively or poor management of our company or one or more divisions or units of our company, among other factors. Our ability to provide our customers with products and services in a reliable and timely manner, in the quantity and quality desired and with a high level of customer service, may be severely diminished as a result. If this happens, we may lose some or all of our customers to one or more of our competitors, which would have a material adverse effect on our business, results of operations or financial condition. In addition, it is important that we continue to meet our customers demands in the truck components industry for product innovation, improvement and enhancement, including the continued development of new-generation products, design improvements and innovations that improve the quality and efficiency of our products. Developing product innovations for the truck components industry has been and will continue to be a significant part of our strategy. However, such development will require us to continue to invest in research and development and sales and marketing. Our recent financial condition has constrained our ability to make such investments. In the future, we may not have sufficient resources to make such necessary investments, or we may be unable to make the technological advances necessary to carry out product innovations sufficient to meet our customers demands. We are also subject to the risks generally associated with product development, including lack of market acceptance, delays in product development and failure of products to operate properly. We may, as a result of these factors, be Table of Contents Accuride Corporation 7140 Office Circle Evansville, Indiana 47715 (812) 962-5000 Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2010. Table of Contents unable to meaningfully focus on product innovation as a strategy and may therefore be unable to meet our customers demand for product innovation. Our products may be rendered obsolete or less attractive by changes in regulatory, legislative or industry requirements. Changes in regulatory, legislative or industry requirements may render certain of our products obsolete or less attractive. Our ability to anticipate changes in these requirements, especially changes in regulatory standards, will be a significant factor in our ability to remain competitive. We may not be able to comply in the future with new regulatory, legislative and/or industrial standards that may be necessary for us to remain competitive and certain of our products may, as a result, become obsolete or less attractive to our customers. Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service curtailments or shutdowns. We manufacture our products at 17 facilities and provide logistical services at our just-in-time sequencing facilities in the United States. An interruption in production or service capabilities at any of these facilities as a result of equipment failure or other reasons could result in our inability to produce our products, which would reduce our net sales and earnings for the affected period. In the event of a stoppage in production at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, expose us to damage claims from our customers and cause us to lose future sales. Our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. We may experience plant shutdowns or periods of reduced production as a result of equipment failure, delays in deliveries or catastrophic loss, which could have a material adverse effect on our business, results of operations or financial condition. We may incur potential product liability, warranty and product recall costs. We are subject to the risk of exposure to product liability, warranty and product recall claims in the event any of our products results in property damage, personal injury or death, or does not conform to specifications. We may not be able to continue to maintain suitable and adequate insurance in excess of our self-insured amounts on acceptable terms that will provide adequate protection against potential liabilities. In addition, if any of our products proves to be defective, we may be required to participate in a recall involving such products. A successful claim brought against us in excess of available insurance coverage, if any, or a requirement to participate in any product recall, could have a material adverse effect on our business, results of operations or financial condition. Work stoppages or other labor issues at our facilities or at our customers facilities could have a material adverse effect on our operations. As of June 30, 2010, unions represented approximately 56% of our workforce. As a result, we are subject to the risk of work stoppages and other labor relations matters. Any prolonged strike or other work stoppage at any one of our principal unionized facilities could have a material adverse effect on our business, results of operations or financial condition. We have collective bargaining agreements with different unions at various facilities. These collective bargaining agreements expire at various times over the next few years, with the exception of our union contract at our Monterrey, Mexico facility, which expires on an annual basis. The 2010 negotiations in Monterrey and Elkhart have been completed. During the remainder of 2010, we have contracts expiring at our Erie and Rockford facilities. Any failure by us to reach a new agreement upon expiration of other union contracts may have a material adverse effect on our business, results of operations or financial condition. In addition, if any of our customers experience a material work stoppage, that customer may halt or limit the purchase of our products. This could cause us to curtail or shut down production facilities relating to these products, which could have a material adverse effect on our business, results of operations or financial condition. Table of Contents We are subject to a number of environmental laws and regulations that may require us to make substantial expenditures or cause us to incur substantial liabilities. Our operations, facilities, and properties are subject to extensive and evolving laws and regulations pertaining to air emissions, wastewater and stormwater discharges, the handling and disposal of solid and hazardous materials and wastes, the investigation and remediation of contamination, and otherwise relating to health, safety, and the protection of the environment and natural resources. The violation of such laws can result in significant fines, penalties, liabilities or restrictions on operations. From time to time, we are involved in administrative or legal proceedings relating to environmental, health and safety matters, and have in the past incurred and will continue to incur capital costs and other expenditures relating to such matters. For example, we are involved in proceedings regarding alleged violations of air regulations at our Rockford facility and stormwater regulations at our Brillion facility, which could subject us to fines, penalties or other liabilities. In connection with such matters, we are negotiating with state authorities regarding certain capital improvements related to the underlying allegations. Based on current information, we do not expect that these matters will have a material adverse effect on our business, results of operations or financial conditions; however, we cannot assure you that these or any other future environmental compliance matters will not have such an effect. In addition to environmental laws that regulate our ongoing operations, we are also subject to environmental remediation liability. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act, which we refer to as CERCLA, and analogous state laws, we may be liable as a result of the release or threatened release of hazardous materials into the environment regardless of when the release occurred. We are currently involved in several matters relating to the investigation and/or remediation of locations where we have arranged for the disposal of foundry and other wastes. Such matters include situations in which we have been named or are believed to be potentially responsible parties in connection with the contamination of these sites. Additionally, environmental remediation may be required to address soil and groundwater contamination identified at certain of our facilities. As of June 30, 2010, we had an environmental reserve of approximately $1.5 million, related primarily to our foundry operations. This reserve is based on management s review of potential liabilities as well as cost estimates related thereto. The reserve takes into account the benefit of a contractual indemnity given to us by a prior owner of our wheel-end subsidiary. The failure of the indemnitor to fulfill its obligations could result in future costs that may be material. Any expenditures required for us to comply with applicable environmental laws and/or pay for any remediation efforts will not be reduced or otherwise affected by the existence of the environmental reserve. Our environmental reserve may not be adequate to cover our future costs related to the sites associated with the environmental reserve, and any additional costs may have a material adverse effect on our business, results of operations or financial condition. The discovery of additional environmental issues, the modification of existing laws or regulations or the promulgation of new ones, more vigorous enforcement by regulators, the imposition of joint and several liability under CERCLA or analogous state laws, or other unanticipated events could also result in a material adverse effect. The Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants, which we refer to as the NESHAP, was developed pursuant to Section 112(d) of the Clean Air Act and requires major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. Based on currently available information, we do not anticipate material costs regarding ongoing compliance with the NESHAP; however if we are found to be out of compliance with the NESHAP, we could incur liability that could have a material adverse effect on our business, results of operations or financial condition. Future climate change regulation may require us to make substantial expenditures or cause us to incur substantial liabilities. Many scientists, legislators and others attribute climate change to increased emissions of greenhouse gases, which we refer to as GHGs, which has led to significant legislative and regulatory efforts to limit GHGs. There are bills pending in Congress that would limit and reduce GHG emissions through a cap-and-trade system of allowances and credits, under which emitters would be required to buy allowances to offset emissions. In addition, in late 2009, the U.S. Environmental Protection Agency, which we refer to as the EPA, promulgated a rule requiring certain emitters of GHGs to monitor and report data with respect to their GHG emissions and in June 2010 promulgated a rule Table of Contents regarding future regulation of GHG emissions from stationary sources. Also, several states, including states in which we have facilities, are considering or have begun to implement various GHG registration and reduction programs. Certain of our facilities use significant amounts of energy and may emit amounts of GHGs above certain existing and/or proposed regulatory thresholds. GHG laws and regulations could increase the price of the energy we purchase, require us to purchase allowances to offset our own emissions, require us to monitor and report our GHG emissions or require us to install new emission controls at our facilities, any one of which could significantly increase our costs or otherwise negatively affect our business, results of operations or financial condition. In addition, future efforts to curb transportation-related GHGs could result in a lower demand for our products, which could negatively affect our business, results of operation or financial condition. While future GHG regulation appears increasingly likely, it is difficult to predict how these regulations will affect our business, results of operations or financial condition. We might fail to adequately protect our intellectual property or third parties might assert that our technologies infringe on their intellectual property. The protection of our intellectual property is important to our business. We rely on a combination of trademarks, copyrights, patents, and trade secrets to provide protection in this regard, but this protection might be inadequate. For example, our pending or future trademark, copyright, and patent applications might not be approved or, if allowed, they might not be of sufficient strength or scope. Conversely, third parties might assert that our technologies or other intellectual property infringe on their proprietary rights. Any intellectual property-related litigation could result in substantial costs and diversion of our efforts and, whether or not we are ultimately successful, the litigation could have a material adverse effect on our business, results of operations or financial condition. Litigation against us could be costly and time consuming to defend. We are regularly subject to legal proceedings and claims that arise in the ordinary course of business, such as workers compensation claims, OSHA investigations, employment disputes, unfair labor practice charges, customer and supplier disputes, and product liability claims arising out of the conduct of our business. Litigation may result in substantial costs and may divert management s attention and resources from the operation of our business, which could have a material adverse effect on our business, results of operations or financial condition. Substantially all the members of our board of directors, who we refer to as the Board of Directors, have been associated with the Company for a relatively short period of time. As of the effective date of the Plan of Reorganization, substantially all of the members of our Board of Directors were replaced with individuals who were not previously members of our Board of Directors. Accordingly, these members of our Board of Directors will have to devote significant time and effort to familiarizing themselves with the details of our business, which may divert focus from our business operations. If a person unaffiliated with us were to acquire a substantial amount of our common stock or notes, a change of control could occur. If a person is able to acquire a substantial amount of our common stock and/or notes, a change of control could be triggered under Delaware General Corporation Law, our senior credit facility or the indenture governing the notes. If a change of control under our senior credit facility (as defined below) or the indentures governing the notes or the senior secured notes (as defined below) was to occur, we would need to obtain a waiver from our lenders or noteholders, as applicable, or amend such debt instruments. Otherwise, the lenders or noteholders, as applicable, could accelerate the debt outstanding under such debt instruments. If we are unable to obtain a waiver or otherwise refinance this debt, our liquidity and capital resources would be significantly limited, and our business operations could be materially and adversely impacted. If we fail to retain our executive officers, our business could be harmed. Our success largely depends on the efforts and abilities of our executive officers. Their skills, experience and industry contacts significantly contribute to the success of our business and our results of operations. The loss of Table of Contents any one of them could have a material adverse effect on our business, results of operations or financial condition. All of our executive officers are at will, but each of them has a severance agreement, as discussed directly below, other than our current interim President and Chief Executive Officer. In addition, our future success and profitability will also depend, in part, upon our continuing ability to attract and retain highly qualified personnel throughout our company, including a permanent Chief Executive Officer. We have entered into typical severance arrangements with certain of our senior management employees, which may result in certain costs associated with strategic alternatives. Severance and retention agreements with certain senior management employees provide that the participating executive is entitled to a regular severance payment if we terminate the participating executive s employment without cause or if the participating executive terminates his or her employment with us for good reason (as these terms are defined in the agreement) at any time other than during a Protection Period. The regular severance benefit is equal to the participating executive s base salary for one year. A Protection Period begins on the date on which a change in control (as defined in the agreement) occurs and ends 18 months after a change in control. A change in control within the meaning of the agreements occurred as a result of the implementation of the Plan of Reorganization for all then outstanding severance and retention agreements, which did not include the severance and retention agreement with Mr. Woodward entered into after our emergence from Chapter 11 bankruptcy proceedings. The change in control severance benefit is payable to an executive if his or her employment is terminated during the Protection Period either by the participating executive for good reason or by us without cause. The change in control severance benefits for Tier II executives (Messrs. Gulda, Maniatis, Schomer, Woodward and Wright) consist of a payment equal to 200% of the executive s salary plus 200% of the greater of (i) the annualized incentive compensation to which the executive would be entitled as of the date on which the change of control occurs or (ii) the average incentive compensation award over the three years prior to termination. The change in control severance benefits for Tier III executives (other key executives) consist of a payment equal to 100% of the executive s salary and 100% of the greater of (i) the annualized incentive compensation to which the executive would be entitled as of the date on which the change of control occurs or (ii) the average incentive compensation award over the three years prior to termination. If the participating executive s termination occurs during the Protection Period, the severance and retention agreement also provides for the continuance of certain other benefits, including reimbursement for forfeitures under qualified plans and continued health, disability, accident and dental insurance coverage for the lesser of 18 months (or 12 months in the case of Tier III executives) from the date of termination or the date on which the executive receives such benefits from a subsequent employer. There are currently no Tier I executive with severance and retention agreements. Neither the regular severance benefit nor the change in control severance benefit is payable if we terminate the participating executive s employment for cause, if the executive voluntarily terminates his or her employment without good reason or if the executive s employment is terminated as a result of disability or death. Any payments to which the participating executive may be entitled under the agreement will be reduced by the full amount of any payments to which the executive may be entitled due to termination under any other severance policy offered by us. These agreements would make it costly for us to terminate certain of our senior management employees and such costs may also discourage potential acquisition proposals, which may negatively affect our stock price. Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs. Future strategic initiatives could include divestitures, acquisitions, and restructurings, the success and timing of which will depend on various factors. Many of these factors are not in our control. In addition, the ultimate benefit of any acquisition would depend on the successful integration of the acquired entity or assets into our existing business. Failure to successfully identify, complete, and/or integrate future strategic initiatives could have a material adverse effect on our business, results of operations or financial condition. Table of Contents Additionally, our strategy contemplates significant growth in international markets in which we have significantly less market share and experience than we have in our domestic operations and markets. An inability to penetrate these international markets could adversely affect our results of operations. Risks Related to Our Indebtedness Our substantial leverage and significant debt service obligations could have a material adverse effect on our financial condition or our ability to fulfill our obligations and make it more difficult for us to fund our operations. As of June 30, 2010, the carrying value of our total indebtedness was $630.0 million, which includes borrowings of $310.5 million under our previous senior credit facility and $140.0 million of notes recorded with a market valuation of $319.4 million. Our substantial level of indebtedness and debt service obligations could have important negative consequences to us, including: difficulty satisfying our obligations with respect to our indebtedness; difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes; increased vulnerability to general economic downturns and adverse industry conditions; limited flexibility in planning for, or reacting to, changes in our business and in our industry in general; our leverage could place us at a competitive disadvantage compared to our competitors that have less debt; and limited flexibility in planning for, or reacting to, changes in our business and industry. In addition, certain of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of increasing interest rates. As of June 30, 2010, our total debt was $450.6 million, of which $310.5 million, or approximately 69%, was subject to variable interest rates. If interest rates increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remains the same. Despite our substantial leverage, we and our subsidiaries will be able to incur more indebtedness. This could further exacerbate the risk immediately described above, including our ability to service our indebtedness. We and our subsidiaries may be able to incur additional indebtedness in the future. Although our senior credit facility and the indentures governing the notes and the senior secured notes contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of qualifications and exceptions, and under certain circumstances indebtedness incurred in compliance with such restrictions could be substantial. For example, we may incur additional debt to, among other things, finance future acquisitions, expand through internal growth, fund our working capital needs, comply with regulatory requirements, respond to competition or for general financial reasons alone. To the extent new debt is added to our and our subsidiaries current debt levels, the risks described above would increase. To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. Our business may not, however, generate sufficient cash flow from operations. Our currently anticipated cost savings and operating improvements may not be realized on schedule. Also, future borrowings may not be available to us under our senior credit facility in an amount sufficient to enable us to pay our indebtedness or to fund other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional equity Table of Contents capital or refinance all or a portion of our indebtedness. We are unable to predict the timing of such sales or the proceeds which we could realize from such sales, or whether we would be able to refinance any of our indebtedness, including our senior credit facility, the notes and the senior secured notes, on commercially reasonable terms or at all. We are subject to a number of restrictive covenants, which, if breached, may restrict our business and financing activities. Our senior credit facility and the indentures governing the notes and the senior secured notes impose, and the terms of any future indebtedness may impose, operating and other restrictions on our business operations. Such restrictions will affect, and in many respects limit or prohibit, among other things, our ability to: incur additional debt; pay dividends and make distributions; issue stock of subsidiaries; make certain investments; repurchase stock; create liens; enter into affiliate transactions; merge or consolidate; and transfer and sell assets. In addition, our senior credit facility includes other more restrictive covenants and prohibits us from prepaying our other indebtedness, including the notes, while borrowings under our senior credit facility are outstanding. Our senior credit facility also contains a financial covenant which requires us to maintain a fixed charge coverage ratio during any compliance period, which is anytime when the excess availability is less than or equal to the greater of $10,000,000 or 15% of the total commitment under the senior credit facility. Due to the amount of our excess availability (as calculated under the senior credit facility), we are not currently in a compliance period and we do not have to maintain a fixed charge coverage ratio, although this is subject to change. Risks Related to Our Emergence from Chapter 11 Bankruptcy Proceedings Our actual financial results may vary significantly from the projections filed with the bankruptcy court, and investors should not rely on the projections. Neither the projected financial information that we previously filed with the bankruptcy court in connection with our Chapter 11 bankruptcy proceedings nor the financial information included in the disclosure statement filed with the bankruptcy court in connection with our Chapter 11 bankruptcy proceedings, which we refer to as the Disclosure Statement, should be considered or relied on in connection with the purchase of the notes or the registrable common stock. We were required to prepare projected financial information to demonstrate to the bankruptcy court the feasibility of the Plan of Reorganization and our ability to continue operations upon emergence from Chapter 11 bankruptcy proceedings. This projected financial information was filed with the bankruptcy court as part of our Disclosure Statement approved by the bankruptcy court. The projections reflect numerous assumptions concerning our anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results will vary from those contemplated by the projections for a variety of reasons. Furthermore, the projections were limited by the information available to us as of the date of the preparation of the projections, including production forecasts published by ACT Publications, which have substantially been revised (the revised numbers being included in this registration statement). Therefore, variations from the projections may be material, and investors should not rely on such projections. Because of the adoption of Fresh Start Accounting and the effects of the transactions contemplated by the Plan of Reorganization, financial information subsequent to February 26, 2010, will not be comparable to financial information prior to February 26, 2010. Table of Contents Upon our emergence from Chapter 11 bankruptcy proceedings, we adopted fresh start accounting, which we refer to as Fresh Start Accounting, in accordance with Accounting Standards Codification No. 852, Reorganizations, which we refer to as ASC 852, pursuant to which the midpoint of the range of our reorganization value was allocated to our assets and liabilities in conformity with the procedures specified by ASC 805, Business Combinations. Accordingly, our financial statements subsequent to February 26, 2010 will not be comparable in many respects to our financial statements prior to February 26, 2010. The lack of comparable historical financial information may discourage investors from purchasing our securities. Our emergence from Chapter 11 bankruptcy proceedings may limit our ability to offset future U.S. taxable income with tax losses and credits incurred prior to emergence from Chapter 11 bankruptcy proceedings. In connection with our emergence from Chapter 11 bankruptcy proceedings, we were able to retain a portion of our U.S. net operating loss and tax credit carryforwards, which refer to, collectively, as Tax Attributes. However, the Internal Revenue Code of 1986, as amended, which we refer to as the Code, Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its Tax Attributes against future U.S. taxable income in the event of a change in ownership. Our emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of Code Section 382. In our situation, the limitation under the Code will be based on the value of our equity (for purposes of the applicable tax rules) on or around the time of emergence, and increased to take into account the recognition of built-in gains. As a result, our future U.S. taxable income may not be fully offset by the Tax Attributes if such income exceeds our annual limitation, and we may incur a tax liability with respect to such income. In addition, subsequent changes in ownership for purposes of the Code could further diminish our ability to utilize Tax Attributes. We may be subject to claims that were not discharged in the Chapter 11 bankruptcy proceedings, which could have a material adverse effect on our results of operations and profitability. Substantially all of the claims against us that arose prior to the date of our bankruptcy filing were resolved during our Chapter 11 bankruptcy proceedings or are in the process of being resolved in the bankruptcy court as part of the claims reconciliation process. Although we anticipate that the remaining claims will be handled in due course with no material adverse effect to our business, financial operations or financial conditions, we cannot assure you that this will be the case or that the resolution of such claims will occur in a timely manner or at all. Subject to certain exceptions (such as certain employee and customer claims) and as set forth in the Plan of Reorganization, all claims against and interests in us and our domestic subsidiaries that arose prior to the initiation of our Chapter 11 bankruptcy proceedings are (1) subject to compromise and/or treatment under the Plan of Reorganization and (2) discharged, in accordance with the Bankruptcy Code and terms of the Plan of Reorganization. Pursuant to the terms of the Plan of Reorganization, the provisions of the Plan of Reorganization constitute a good faith compromise or settlement of all such claims and the entry of the order confirming the Plan of Reorganization or other orders resolving objections to claims constitute the bankruptcy court s approval of the compromise or settlement arrived at with respect to all such claims. Circumstances in which claims and other obligations that arose prior to our bankruptcy filing may not have been discharged include instances where a claimant had inadequate notice of the bankruptcy filing. Risks Related to our Common Stock Our common stock is not listed on any securities exchange and, as a result, our common stock may be less liquid than it otherwise would be if listed on a securities exchange. Our common stock is not listed on any securities exchange. Instead, our common stock is currently traded over-the-counter on the OTCBB. Over-the-counter transactions involve risks in addition to those associated with transactions in securities traded on a securities exchange. Many over-the-counter securities trade less frequently and in smaller volumes than exchange-listed securities. Accordingly, our common stock may be less liquid than it would otherwise be and may be difficult to sell. Also, the value of our common stock may be more volatile than exchange-listed securities. In addition, issuers of securities traded on the OTCBB do not have to meet the same specific quantitative and qualitative listing and maintenance standards. Our common stock would be diluted by the conversion of the notes, including the PIK interest payable on the Table of Contents notes, by the exercise of the warrants and by the vesting of restricted stock units, which we refer to as RSUs. As of August 5, 2010, 126,294,882 shares of our common stock were outstanding. As of the effective date of the Plan of Reorganization, $140.0 million aggregate principal amount outstanding of notes was convertible into an additional 186,666,662 shares of common stock (representing an initial conversion price of $0.75 per share). Additionally, the first six interest payments on the notes will be paid as PIK interest in the form of additional notes, which will also be convertible into additional shares of our common stock. Furthermore, the indenture governing the notes provides for an adjustment to the conversion rate in effect at the time of any PIK interest payment, which prevents the notes outstanding immediately prior to the PIK interest payment from being diluted by the notes paid as PIK interest. After taking into account the issuance of all six payments of PIK interest and the adjustments to the conversion rate resulting from such issuances (but no other issuances, adjustments or events that may occur), the notes would be convertible into 353,064,258 shares of common stock. Accordingly, the notes, if converted, will have a dilutive effect on our outstanding common stock. Additionally, as of the effective date of the Plan of Reorganization, there are warrants outstanding exercisable for an additional 22,058,824 shares of our common stock. These warrants, if exercised, would also have a dilutive effect on our outstanding common stock. On May 17, 2010, our Board of Directors approved the issuance of approximately 1.8 million RSUs to our employees. Upon vesting, these RSUs would also have a dilutive effect on our outstanding common stock. We may issue additional equity securities, which would lead to dilution of our issued and outstanding common stock. The issuance of additional equity securities or securities convertible into equity securities would result in dilution of existing stockholders equity interest in us. We are authorized to issue, without stockholder approval, 100,000,000 shares of preferred stock, $0.01 par value per share, which we refer to as preferred stock, in one or more series, which may give other stockholders dividend, conversion, voting, and liquidation rights, among other rights, that may be superior to the rights of holders of our common stock. Our Board of Directors has the authority to issue, without the vote or action of stockholders, shares of preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. Our board of directors has no present intention of issuing any such preferred series, but reserves the right to do so in the future. In addition, our authorized capital stock includes up to 800,000,000 shares of common stock, $0.01 par value per share, of which 126,294,882 were outstanding as of August 5, 2010. Risks Related to the Notes Not all of our subsidiaries are guarantors, assets of non-guarantor subsidiaries may not be available to make payments on the notes. Payments on the notes are only required to be made by us and the subsidiary guarantors. Our foreign subsidiaries do not guarantee the notes. As a result, no payments are required to be made from assets of subsidiaries which do not guarantee the notes unless those assets are transferred, by dividend or otherwise, to us or a subsidiary guarantor. In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries, holders of their debt, including their trade creditors, will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us. For further information regarding our non-guarantor subsidiaries, see note 19 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009 and note 11 to our consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. Although your notes are referred to as senior notes, and the subsidiary guarantees are senior obligations of our subsidiaries, each will be effectively subordinated to our secured debt and any secured liabilities of our subsidiaries. The notes will effectively rank junior to any of our existing or future senior secured debt or any secured debt of our subsidiaries, to the extent of the value of the assets securing that debt. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the notes only after that senior secured debt has been repaid in full from these assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all the notes then outstanding. Table of Contents Similarly, the guarantees of the notes will effectively rank junior to any senior secured debt of the applicable subsidiary, to the extent of the value of the assets securing that debt. The tax characterization of the notes as debt or equity for U.S. federal income tax purposes is uncertain and the tax consequences to holders of owning and disposing of the notes could be materially affected by such characterization. We are taking the position that the notes should be classified as equity for U.S. federal income tax purposes. However, the classification of the notes as equity or debt is uncertain. If the notes are treated as equity for U.S. federal income tax purposes, it is possible that the IRS may assert, among other things, that payments of PIK interest to non-U.S. holders are subject to U.S. withholding tax. Whether the notes are treated as equity or debt for U.S. federal income tax purposes, certain conversion rate adjustments, including the adjustment in connection with the payment of PIK interest on the notes, may result in a taxable distribution to holders of the notes, which for non U.S. holders may be subject to U.S. withholding tax. If the notes were to be treated as debt for U.S. federal income tax purposes, the tax consequences of the ownership and disposition of the notes could be materially different than if the notes were treated as equity. If the notes are treated as debt, U.S. holders will be required to treat PIK interest as original issue discount includible in gross income for U.S. federal income tax purposes in advance of the receipt of cash payments to which the income is attributable, regardless of a holder s method of tax accounting. For a discussion of the tax consequences of the ownership and disposition of the notes, including the classification of the notes for U.S. federal income tax purposes, see Material U.S. Federal Income Tax Consequences. Holders should discuss with their own tax advisors the tax consequences of the ownership and disposition of the notes. A change in control may adversely affect us or the notes. We may be required, at the option of a holder, to repurchase the notes upon the occurrence of a change of control, which could, among other things, discourage a potential acquiror. In addition, future debt we incur may limit our ability to repurchase the notes upon a change in control. Moreover, if you or other investors in the notes exercise the repurchase right for a change in control, it may cause a default under that debt. Finally, if a change in control occurs, we cannot assure you that we will have enough funds to repurchase all the notes. One of the circumstances under which a change in control may occur is upon the sale or disposition of all or substantially all of our capital stock or assets. However, the phrase all or substantially all will likely be interpreted under the law of the State of New York, which is the law governing the indenture, and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or disposition of all or substantially all of our capital stock or assets has occurred, in which case, the ability of a holder of the notes to obtain the benefit of an offer to purchase all or a portion of the notes held by such holder may be impaired. The market price of the notes could be significantly affected by the market price of our common stock and other factors. We expect that the market price of the notes will be significantly affected by the market price of our common stock. This may result in greater volatility in the market price of the notes than would be expected for nonconvertible debt securities. The trading market for the notes may be limited. The notes are a new issue of securities for which there is currently no trading market. We do not intend to list the notes on any national securities exchange or automated quotation system. Accordingly, we cannot predict whether an active trading market for the notes will develop or be sustained. If an active trading market for the notes fails to develop or be sustained, the trading price for the notes could fall. Moreover, even if an active trading market for the notes were to develop, the notes could trade at prices that may be lower than the purchase price of the notes. Future trading prices of the notes will depend on many factors, including, among other things, prevailing interest rate, our operating results, the price of our common stock and the market for similar securities. Historically, the market for convertible debt has been subject to disruptions that have caused volatility in prices. It is possible that the market for the notes will be subject to disruptions which may have a negative effect on the holders of the notes, regardless of our prospects or financial performance. FORWARD-LOOKING STATEMENTS This prospectus and any accompanying prospectus supplement, including the information we incorporate by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. Such statements are based on management s beliefs and assumptions and on information currently available to our management. You can identify most forward-looking statements by the use of words such as anticipates, believes, could, estimates, expects, intends, may, plans, potential, predicts, projects, and similar expressions intended to identify forward-looking statements, although not all

parsed_sections/risk_factors/2010/CIK0000923152_gunite_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

parsed_sections/risk_factors/2010/CIK0000923154_brillion_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

parsed_sections/risk_factors/2010/CIK0000923156_fabco_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

parsed_sections/risk_factors/2010/CIK0000927807_intervest_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investment in our Class A common stock involves a high degree of risk. We urge you to read all of the information contained or incorporated by reference in this prospectus, including the Special Cautionary Note Regarding Forward-Looking Statements. In addition, we urge you to consider carefully the following risk factors in evaluating an investment in our Class A common stock before you purchase any shares of our Class A common stock offered by this prospectus. Risks Related to Our Business Additional increases in our level of nonperforming assets could have an adverse effect on our financial condition and operating results. Our results of operations for the last two years and for the first half of 2010 have been negatively impacted by the weak economy, high rates of unemployment, increased office and retail vacancy rates and lower commercial real estate values, all of which have resulted in a significant increase in our nonperforming assets and associated loan and real estate loss provisions and related expenses to carry these assets. We expect these unfavorable conditions to continue for some period of time. Although we have and will continue to actively manage the resolution of our nonperforming and problem assets on an individual basis, due to the cost of and delays we have encountered in connection with the pursuit of available remedies and to respond to concerns from our regulators to reduce our criticized assets, we completed a bulk sale in order to accelerate the reduction of our problem assets. On May 25, 2010, we sold certain non-performing and underperforming loans on commercial real estate and multi-family properties and some real estate owned. The assets sold aggregated to approximately $207 million and consisted of $187 million of loans and $14.4 million of real estate owned by INB and $5.6 million of loans owned by IMC. All of the assets were sold at a substantial discount to their net carrying values of $197.7 million for an aggregate purchase price of $121.5 million. As a result of this bulk sale, we recorded a $78.6 million combined provision for loan and real estate losses, which contributed approximately $44 million to the net loss we reported in the first half of 2010. Our nonperforming assets at June 30, 2010, amounted to $53.2 million, or 2.46% of our total assets, and were comprised of $18.9 million of nonaccrual loans and $34.3 million of real estate acquired through foreclosure. At June 30, 2010, we also had $21.4 million of accruing troubled debt restructurings on which we have granted certain concessions to provide payment relief generally consisting of the deferral of principal and or interest payments for a period of time, or a partial reduction in interest payments. No assurance can be given that we will not be required to sell these as well as other problem assets in the future below their then net carrying values. Our ability to complete foreclosure or other proceedings to acquire and sell certain collateral properties in many cases can be delayed by various factors including bankruptcy proceedings and an overloaded court system. As a result, the timing and amount of the resolution and/or disposition of nonaccrual loans as well as foreclosed real estate cannot be predicted with certainty. If the current downturn in commercial real estate values and local economic conditions in both New York and Florida or if the delays noted above continues, it will have an adverse impact on our asset quality, level of nonperforming assets, operating costs, charge-offs, profitability and capital. We also do not record interest income on nonaccrual loans or real estate owned, thereby adversely affecting our income, and we also incur increased related administration costs. In addition, the resolution of our nonperforming assets requires significant commitments of time from our management and directors, which could be detrimental to the performance of their other responsibilities. All of the above factors could have an adverse effect on our financial condition and operating results. We may have higher loan and real estate losses than we have allowed for which could adversely affect our financial condition and operating results. We maintain an allowance for loan losses and a valuation allowance for real estate losses that we believe reflect the risks of losses inherent in our loan portfolio and our portfolio of real estate acquired through foreclosure. There is a risk that we may experience losses that could exceed the allowances we have set aside. In determining the size of the allowances, we make various assumptions and judgments about the collectability of our loan portfolio and the estimated market values of collateral properties and foreclosed real estate, which are discussed under the caption Critical Accounting Policies in our most recent Report on Form 10-Q, which is incorporated herein by reference. If our assumptions and judgments prove to be incorrect, we may have to increase these allowances by recording additional provisions, which could have an adverse effect on our operating results and financial condition. Furthermore, our regulators may require us to make additional provisions for loan and real estate losses and/or recognize additional charge-offs after their periodic review of these portfolios and related allowances, which could also have a material adverse effect on our financial condition and results of operations. As part of the proposed formal agreement with the OCC, we will be required to evaluate our allowance for loan loss methodology, which could cause additional provisions for loan losses to be taken. Table of Contents We are subject to the risks and costs associated with the ownership of real estate, which could adversely affect our operating results and financial condition. We may need to foreclose on the properties that collateralize our mortgage loans that are in default as a means of repayment and may thereafter own and operate such properties, which expose us to risks and costs inherent in the ownership of real estate. The amount that we may realize from the sale of a collateral property is dependent upon the market value of the property at the time we are able to find a buyer and actually sell the asset. In addition, the costs associated with the ownership of real estate, principally real estate taxes, insurance and maintenance and repair costs, may exceed the rental income earned from the property, if any, and we may therefore have to advance additional funds in order to protect our investment or we may be required to dispose of the property at a loss. Further, hazardous substances could be discovered on the properties and we may be required to remove the substances from and remediate the properties at our expense, which could be substantial. We may not have adequate remedies against the owners of the properties or other responsible parties and the remedies may involve substantial delay and expense to us and we may find it difficult to sell the affected properties and we may be forced to own the properties for an extended period of time. All of the above factors could adversely affect our operating results and financial condition. Our loan portfolio is concentrated in commercial and multi-family real estate mortgage loans, which increases the risk associated with our loan portfolio. Our loan portfolio is concentrated in loans secured by commercial and multi-family real estate (including rental apartment buildings, retail condominium units, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial/warehouse properties, parking lots/garages, mobile home parks, self-storage facilities and some vacant land). This concentration increases the risk associated with our loan portfolio because commercial real estate and multi-family loans are generally considered riskier than many other kinds of loans, like single family residential real estate loans, since these loans tend to involve larger loan balances to one borrower or groups of related borrowers and repayment of such loans is typically dependent upon the successful operation of the underlying real estate. Furthermore, the banking regulators continue to give commercial real estate lending greater scrutiny and banks with higher levels of these loans are expected to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of commercial real estate lending growth and exposures. Additionally, we have loans secured by vacant or substantially vacant properties as well as some vacant land, all of which typically do not have adequate or any income streams and depend upon other sources of cash flow from the borrower for repayment. Furthermore, many of our borrowers have more than one mortgage loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss. As of June 30, 2010, our average real estate loan size was $2.4 million. Regardless of the underwriting criteria we utilize, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market and economic conditions affecting the value of our loan collateral and problems affecting the credit and business of our borrowers. Our ability to recover our investment in the mortgage loans we originate is dependent on the market value of the properties underlying such loans because many of our mortgage loans have nonrecourse or limited recourse. In addition, our losses in connection with delinquent and foreclosed loans may be more pronounced because our commercial and multi-family real estate mortgage loans generally defer repayment of a substantial part of the original principal amount until maturity. In the event we are required to foreclose on a property securing one of our mortgage loans or otherwise pursue our remedies in order to protect our investment, there can be no assurance that we will recover funds in an amount sufficient to prevent a loss to us. The market value of the real estate collateralizing our loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of our loans. All of the above factors could adversely affect our operating results and financial condition. The properties securing our loans are concentrated in New York and Florida, which increases the risk associated with our loan portfolio. The properties securing our mortgage loans are concentrated in New York and Florida (our two primary lending market areas), which have and continue to suffer weak economic conditions and lower commercial real estate values. Additionally, we have and will continue to lend in geographical areas that are in the process of being revitalized or redeveloped which can be negatively impacted to a greater degree in an economic downturn. Properties securing our loans in these types of neighborhoods may be more susceptible to fluctuations in property values than in more established areas. Many of the multi-family properties located in New York City and surrounding areas are also subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents, which may in turn limit the borrower s ability to repay those mortgage loans which results in a higher degree of risk. Taxes on real property in Florida have also increased substantially in recent years, and New York is facing budget deficits that could result in higher taxes. Higher taxes may adversely affect our borrowers cash flows and our costs of foreclosed property as well as real estate values generally. Table of Contents Political issues, including armed conflicts and acts of terrorism, may have an adverse impact on economic conditions of the country as a whole and may be more pronounced in specific geographic regions. Economic conditions affect the market value of the mortgaged properties underlying our loans as well as the levels of rent and occupancy of income-producing properties. Since a large number of properties underlying our mortgage loans are located in New York City, we may be more vulnerable to the adverse impact of such occurrences than other institutions. Acts of terrorism could have a significant impact on our ability to conduct our business. Such events could affect the ability of our borrowers to repay their loans, could impair the value of the collateral securing our loans, and could cause significant property damage, thus increasing our expenses and/or reducing our revenues. All of the above factors could adversely affect our operating results and financial condition. Our concentration on commercial real estate loans, OCC policies and the proposed formal agreement with the OCC require us to strengthen our management and systems, which has increased our expenses, raised the amount of capital we must maintain, and is expected to further increase our operating costs. The OCC and the other bank regulators require banks with concentrations of assets to have management, policies, procedures and systems appropriate to manage these risks, especially where the real estate loans are concentrated geographically or in particular lines of business. Commercial real estate (inclusive of multifamily properties and vacant land) comprised 99.8% of our total loan portfolio and 65% of our total assets, and represented 852% of our total stockholders equity at June 30, 2010. We have been and will continue to be required to hold heightened levels of capital as a result of the risks of our concentration of commercial real estate loans. The proposed formal agreement with the OCC will require us to better address our real estate concentrations and related risks consistent with OCC guidance, including adopting policies and procedures to identify concentrations and risks within our commercial real estate portfolio, and implementing policies and procedures complying with OCC guidance. These include: Management information systems to better identify, measure, monitor, report and manage commercial real estate risks and compliance with policies and procedures; Maintenance of an adequate allowance for loan losses, consistent with OCC rules; Increased management and board of directors oversight; Actions to control real estate concentrations and reduce related risks; and Actions to reduce interest rate and liquidity risks. These efforts will require increased management time and costs, including additional personnel and costs of consultants and other third parties. Our commercial real estate loans are relatively short-term and we face the risk of borrowers being unable to refinance or pay their loans at maturity which could adversely affect our earnings, credit quality and liquidity. Our commercial real estate loans have an average maturity of approximately four years, and finance properties with long lives. Our borrowers are expected to have to refinance their loans at maturity, or pay the loans at maturity from other sources of cash or from sales of the financed properties. We are therefore subject to the risks that our borrowers will not be able to repay or refinance their loans from us due to adverse conditions in their businesses, unavailability of alternative financing, or an inability to timely sell the property securing our loan. The ongoing credit crisis and disruptions in the commercial real estate markets, the virtual disappearance of the commercial real estate securitization market and other lenders diversification away from commercial real estate lending, as well as declines in property values have all increased our credit risks, increased our delinquent and nonperforming loans, and our foreclosures and the potential for future losses on our loans. Problem and foreclosed loans increase our costs and take additional time and effort to manage. These conditions also reduce the rate of payoffs on our loans, which reduces our customary liquidity from loan turnover. Weak economic conditions in our New York and Florida markets could continue to negatively impact our asset quality, financial condition and operating results. Unlike larger national or regional banks that are more geographically diversified, our business and earnings are closely tied to the local economic conditions and commercial real estate values in New York and Florida. The local economies and commercial real estate values in both states continued to weaken in recent periods and we expect these conditions to continue for some period of time. A sustained and prolonged economic and real estate downturn could continue to adversely affect the quality of our assets, further increase our credit losses, real estate losses and related expenses, and reduce the demand for our products and services, which could adversely affect our financial condition and operating results. Table of Contents Our ability to realize our deferred tax assets will be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support our deferred tax amount, and the amount of our net operating loss carryforward and certain other tax attributes realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code as a result of future sales of our capital securities. As of June 30, 2010, we had a net deferred tax asset of $47.7 million, which includes a gross net operating loss carryforward of approximately $71 million (or $31 million of the total tax asset) that was generated mostly from our recent bulk sale of nonperforming and underperforming assets. This deferred tax asset is available to reduce income taxes payable on our future earnings. The amount of net operating loss carry-forwards and certain other tax attributes realizable annually for income tax purposes may be reduced by an offering and/or other sales of our capital securities, including transactions in the open market by 5% or greater shareholders, if an ownership change is deemed to occur under Section 382 of the Internal Revenue Code. The determination of whether an ownership change has occurred under Section 382 is highly fact specific and can occur through one or more acquisitions of capital stock (including open market trading) if the result of such acquisitions is that the percentage of our outstanding common stock held by shareholders or groups of shareholders owning at least 5% of our common stock at the time of such acquisition, as determined under Section 382, is more than 50 percentage points higher than the lowest percentage of our outstanding common stock owned by such shareholders or groups of shareholders within the prior three-year period. In connection with the bulk sale in May 2010, we also sold shares of our Class A common stock representing approximately 9.9% of our issued and outstanding shares of Class A common stock after issuance. That transaction, combined with future sales of shares of our Class A common stock, could increase the risk of a possible future change in control as defined under Section 382. Hurricanes or other adverse weather or environmental events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations. Our market areas in Florida are especially susceptible to hurricanes and tropical storms and related flooding and wind damage. In addition, our Pinellas County, Florida market may be adversely impacted by the recent BP oil spill in the Gulf of Mexico. Such weather and other environmental events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where we operate. The BP oil spill may adversely affect the cash flows, values and marketability of properties in Florida securing our loans. Hurricane and other storm damage in Florida have increased the costs of insuring properties in Florida. We cannot predict whether or to what extent damage that may be caused by such events will affect our operations or the economies in our current or future market areas, but such events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in loan delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes, tropical storms, including flooding and wind damage, or other environmental events. Many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in our markets. We may be required to recognize additional impairment charges on our investment in trust preferred securities, which would adversely affect our operating results and financial condition. INB owns trust preferred security investments with a net carrying value of $5.2 million at June 30, 2010 that are classified as held to maturity. The estimated fair value of these securities are very depressed due to the unusual credit conditions that the financial industry has faced since the middle of 2008 and weak economic conditions, which has severely reduced the demand for these securities and rendered their trading market inactive. In 2009 and through the first half of 2010, we have recorded other than temporary impairment ( OTTI ) charges totaling $2.8 million on these securities. The OTTI determination was based on an increase in the aggregate amount of deferred and defaulted interest payments on the underlying collateral by the issuing banks such that it is no longer probable that INB will recover its full investment in the applicable security. There can be no assurance that there will not be further write downs in the future on these trust preferred securities, which could adversely affect our operating results and financial condition. Our business strategy may not be successful. Our business strategy is to attract deposits and originate commercial and multi-family real estate loans on a profitable basis. Our ability to execute this strategy depends on factors outside of our control, including the state of economic conditions generally and in our market areas in particular, as well as interest rate trends, the state of credit markets, loan demand, competition, government regulations, regulatory restrictions and other factors. We can provide no assurance that we will be successful in maintaining or increasing the level of our loans and deposits at an acceptable risk or on profitable terms, while also managing the costs of resolving our nonperforming assets. There can be no assurance that there will be any future growth in our current business or that it will be profitable. Table of Contents We depend on a small number of executive officers and other key employees to implement our business strategy and our business may suffer if we lose their services. Our success is dependent on the business expertise of a small number of executive officers and other key employees. Mr. Lowell Dansker, age 59, our Chairman, and Mr. Keith Olsen, age 56, President of the Bank, have historically made all of the underwriting and lending decisions for us. We recently hired a new chief credit officer and have also recently hired an asset/liability manager to enhance the management team s breadth and depth. However, if Mr. Dansker or Mr. Olsen or any of our other executive officers or key employees were to become unavailable for any reason, our business may be adversely affected because of their skills and knowledge of the markets in which we operate, their years of real estate lending experience and the difficulty of promptly finding qualified replacement personnel. To attract and retain qualified personnel to support our business, we offer various employee benefits, including executive employment agreements. We have a written management succession plan that identifies internal officers to perform executive officer functions in case of temporary disruptions due to such things as illnesses or leaves of absence. The plan contains procedures regarding the selection of permanent replacements, if any, for key officers. There can be no assurance that this plan would be effective or that we would be able to attract and retain qualified personnel. Competition for qualified personnel may also lead to increased hiring and retention costs. We face strong competition in our market areas. Our primary markets consist of the New York City area and the Tampa Bay area of Florida, which are highly competitive and such competition may increase further. We experience competition in both lending and attracting deposits from other banks and nonbanks located within and outside our primary market areas, some of which are significantly larger institutions with greater resources, lower cost of funds or a more established market presence. Nonbank competitors for deposits and deposit-type accounts include savings associations, credit unions, securities firms, investment bankers, money market funds, life insurance companies and the mutual fund industry. For loans, we experience competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, credit card companies, credit unions, pension funds and securities firms. Because our business depends on our ability to attract deposits and originate loans profitably, our ability to efficiently compete for depositors and borrowers is critical to our success. External factors that may impact our ability to compete include changes in local economic conditions and commercial real estate values, changes in interest rates, regulatory actions that limit the rates we pay on our deposits to market rates, changes in the credit markets and funds available for lending generally, advances in technology, changes in government regulations and the consolidation of banks and thrifts within our marketplace. We depend on brokers for our loan originations and any reduction in referrals could limit our ability to grow or maintain the size of our loan portfolio. We rely significantly on referrals from commercial real estate mortgage brokers for our loan originations. Our loan origination volume depends on our ability to continue to attract these referrals from mortgage brokers. If those referrals were to decline or not expand, there can be no assurances that other sources of loan originations would be available to us. Liquidity risks could negatively affect our operations and business. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, repayments of loans, or other sources could have a substantial negative effect on our liquidity. In addition to deposits, our primary funding sources include unsecured federal funds that we purchase from correspondent banks as well as secured advances, both short- and longer-term, that are available from the Federal Home Loan Bank of New York and the Federal Reserve Bank of New York, with the use of our investment securities and certain loans that can be pledged as collateral. Other sources of liquidity that may be available to us, but cannot be assured, include our ability to issue and sell debentures, preferred stock or common stock in public or private transactions. Our access to adequate amounts of funding sources on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Our ability to borrow could also be impaired by factors that are not specific to us, such as further disruption in the financial markets, adverse changes in the financial condition of our correspondent banks that supply us with federal funds, or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the credit markets. There can be no assurance that our current level of liquidity sources will be adequate or will not be adversely affected in the future and reduce the availability of funds to us. Volatility in the capital and credit markets may negatively impact our business. The capital and credit markets have experienced severe volatility and disruption. In some cases, the markets produced downward pressure on stock prices and reduced credit availability for certain issuers without regard to those issuers underlying financial condition or performance. If current levels of market disruption and volatility were to continue or worsen, we may experience adverse effects, which may be material, on our ability to access capital or credit and on our business, financial condition and results of operations. Table of Contents Changes in interest rates could adversely impact our earnings and we must continually identify and invest in mortgage loans or other instruments with rates of return above our cost of funds. As a financial institution, we are subject to the risk of fluctuations in interest rates. A significant change in interest rates could have a material adverse effect on our profitability, which depends primarily on the generation of net interest income which is dependent on our interest rate spread, which is the difference between yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities. As a result, our success depends on our ability to invest a substantial percentage of our assets in mortgage loans with rates of return that exceed our cost of funds. We expect lower rates of return from our investment securities, especially our government securities and overnight investments, than from our loans. Regulatory requirements for greater liquidity may adversely affect our profitability. Both the pricing and mix of our interest-earning assets and our interest-bearing liabilities are impacted by such external factors as our local economies, competition for loans and deposits, the state of the credit markets, government monetary policy and market interest rates. Fluctuations in interest rates are difficult to predict and manage and, therefore, there can be no assurance of our ability to maintain a consistent positive interest rate spread. A sudden and substantial change in interest rates may adversely impact our earnings, our cost of funds, loan demand, and the value of our collateral and investment securities. Our level of indebtedness may adversely affect our financial condition and our business. Our borrowed funds (exclusive of deposits) and related interest payable was approximately $99 million at June 30, 2010. This level of indebtedness could make it difficult for us to satisfy all of our obligations to the holders of our debt and could limit our ability to obtain additional debt financing to fund our working capital requirements. The inability to incur additional indebtedness could adversely affect our business and financial condition by, among other things, limiting our flexibility in planning for, or reacting to, changes in our industry; and placing us at a competitive disadvantage with respect to our competitors who may operate on a less leveraged basis. As a result, this may make us more vulnerable to changes in economic conditions and require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, which would reduce the funds available for other purposes. In 2010, we deferred our interest payments on our $56.7 million of outstanding trust preferred securities and suspended the dividend payments on our $25 million of outstanding TARP cumulative preferred stock, which limits our options in raising capital or new funding. Furthermore, the FRB has prohibited us from incurring any new indebtedness without their permission. Reputational risk and social factors may negatively impact us. Our ability to attract and retain depositors and customers is highly dependent upon consumer and other external perceptions of either or both of our business practices and financial condition. Adverse perceptions could damage our reputation to a level that could lead to difficulties in generating and maintaining deposit accounts, accessing credit markets and increased regulatory scrutiny on our business. Borrower payment behaviors also affect us. To the extent that borrowers determine to stop paying on their loans where the financed properties market values are less than the amount of their loan, or otherwise, our costs and losses may increase. Adverse developments or perceptions regarding the business practices or financial condition of our competitors, or our industry as a whole, may also indirectly adversely impact our reputation. In addition, adverse reputational impacts on third parties with whom we have important relationships may also adversely impact our reputation. All of the above factors may result in greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that may change or constrain the manner in which we engage with our customers and the products we offer and may also increase our litigation risk. If these risks were to materialize they could negatively impact our business, financial condition and results of operations. Future acquisitions and expansion activities may disrupt our business, dilute existing shareholders and adversely affect our operating results. We periodically evaluate potential acquisitions and expansion opportunities. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or businesses, as well as other geographic and product expansion activities, involve various risks including: risks of unknown or contingent liabilities; unanticipated costs and delays; risks that acquired new businesses do not perform consistent with our growth and profitability expectations; risks of entering new markets or product areas where we have limited experience; risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; exposure to potential asset quality issues with acquired institutions; difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and start-up delays and costs of other expansion activities; Table of Contents potential disruptions to our business; possible loss of key employees and customers of acquired institutions; potential short-term decreases in profitability; and diversion of our management s time and attention from our existing operations and business. Regulatory Risks Attractive acquisition or expansion opportunities may not be available to us in the future. While we seek continued organic growth, as our earnings and capital position improve, we may consider the acquisition of other businesses or expansion into new product lines. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisitions and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders equity per share of our common stock. Pursuit of new product lines, moreover, will require acquisition of additional resources and personnel and there can be no assurance that such resources and personnel will be available to us or can be obtained without unreasonable costs and expense. We operate in a highly regulated industry and government regulations significantly affect our business. The banking industry is extensively regulated with regulations intended primarily to protect depositors, consumers and the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System, or Federal Reserve Board (FRB) and the Bank is also subject to regulation and supervision by the Office of the Comptroller of the Currency (OCC). Regulatory requirements affect our lending practices, capital structure, investment practices, asset allocations, operating practices, growth and dividend policy. The bank regulatory agencies have broad authority to prevent or remedy unsafe or unsound practices or violations of law. Recently, regulators have intensified their focus on the USA PATRIOT Act s anti-money laundering and Bank Secrecy Act compliance requirements resulting in an increased burden to us. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control (OFAC). We are also subject to regulatory capital requirements, and a failure to meet capital requirements that are applicable to us or to comply with other regulations could result in actions by regulators that could adversely affect our business. In addition, changes in law, regulations and regulatory practices affecting the banking industry may limit the manner in which we may conduct our business. The Dodd-Frank Wall Street Reform and Consumer Protection Act, containing comprehensive regulatory reform, has recently been enacted. While the full effects of the legislation on us cannot yet be determined, it could result in higher compliance and other costs, reduced revenues and higher capital and liquidity requirements, among other things, which could adversely affect our business. Our current operations and activities are subject to heightened regulatory oversight which increases our operating expenses and we expect further formal regulatory enforcement actions that may negatively impact our business. On April 7, 2009, our bank subsidiary INB (also referred to as the Bank) entered into a Memorandum of Understanding ( MOU ) with the OCC, its primary regulator, which requires the Bank to (1) appoint a Compliance Committee to monitor and coordinate the Bank s adherence to the MOU and to submit progress reports to the OCC; (2) develop and implement a Strategic Plan in accordance with guidelines set forth in the MOU; (3) review and revise the Bank s Contingency Funding Plan to address matters outlined in the MOU; (4) develop and implement a written program to improve credit risk management processes that are consistent across the Bank s two primary markets; (5) develop and implement a three-year capital program in accordance with guidelines set out in the MOU; and (6) review and revise the Bank s interest rate risk policy and procedures to address matters set forth in the MOU. Although the Bank believes it has made progress in addressing various matters covered by the MOU, it understands that the OCC plans to pursue and enter into a formal agreement with the Bank, which agreement is likely to cover many of the same areas addressed in the MOU, including the following: appointment of a compliance committee, all but one of which must be independent, to monitor and coordinate adherence to the formal agreement; development of a strategic plan, which will, among other things, establish objectives and identify strategies to achieve those objectives; development of a long-term capital plan and achievement and maintenance of required capital levels; an assessment of certain executive officers; development and implementation of a plan to improve earnings; Table of Contents a program for liquidity risk management and maintenance of adequate liquidity levels with monthly reporting and weekly advisories to the OCC concerning deposit maturities; implementation of a plan to diversify assets; implementation of a plan to improve loan portfolio management; a program to eliminate criticized assets; a program for the review of loans to assure timely identification and characterization of problem credits; a program for the maintenance of an adequate allowance for loan losses consistent with OCC rules; appraisals of real property that are timely and comply with OCC requirements; and interest rate risk policies. Many of these plans and programs will be subject to OCC review and approval. We expect, moreover, that the current capital levels the Bank is required to maintain (Tier 1 capital to total average assets (leverage ratio) - 9%; Tier 1 capital to risk-weighted assets - 10%; and total capital to risk-weighted assets - 12%) will be included in any formal agreement that INB may enter into with the OCC. Our ability to accept brokered deposits, and our control over our deposit pricing, may be limited by agreements with our regulators. If the Bank enters into the formal agreement on the currently expected terms, the Bank will not be allowed to accept brokered deposits without the prior approval of the OCC and it would also be required, in the absence of a waiver from the FDIC, based on a determination that INB operates in high cost deposit markets, to maintain its deposit pricing at or below the national rates published by the FDIC, plus 75 basis points. At June 30, 2010, the Bank had total brokered deposits of $159.6 million, of which $21.5 million (13%) mature by June 30, 2011. At June 30, 2010, all of the Bank s deposit products were at levels at or below the FDIC national rates plus 75 basis points. The FDIC s national rate is a simple average of rates paid by U.S. depository institutions as calculated by the FDIC. As a result of all of the above, our operations, lending activities and capital levels are now subject to heightened regulatory oversight, over and above the extensive regulation which normally applies to us under existing regulations, which will increase our expenses and could negatively impact our business. In addition, failure by the Bank to comply with these heightened requirements could lead to additional regulatory actions, expenses and other restrictions, including the possible sale, merger, liquidation or receivership of the Bank if we are unable to comply. IBC has relied on cash dividends from its subsidiaries. IBC is a separate and distinct legal entity from INB and IMC, its wholly-owned subsidiaries. Prior to January 2010, INB made cash dividend payments to IBC to fund the interest payments on IBC s outstanding debt and the cash dividend requirements on its outstanding preferred stock held by the U.S. Treasury. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company. In addition, IBC s right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary is subject to the prior claims of the subsidiary s creditors. The inability to receive dividends from INB materially and adversely affects IBC s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common or preferred stock, which could have a material adverse effect on our business. In January 2010, INB was informed by it primary regulator, the OCC, that it will not be permitted to pay any cash dividends to IBC. INB accordingly suspended its cash dividend payments effective January 2010. FDIC deposit insurance premiums have increased substantially and may increase further, which will adversely affect our results of operations. Our operating results have been negatively impacted by a substantial increase in FDIC premiums for all FDIC insured banks. Our FDIC insurance expense for 2009 increased 246% from 2008 to $5.2 million, which included a special assessment imposed in June 2009 on all insured banks and amounted to $1.1 million for us. We expect deposit insurance premiums will continue to remain at a high level and may increase for all banks, including the possibility of additional special assessments, due to recent strains on the FDIC deposit insurance fund resulting from recent bank failures and an increase in the number of banks likely to fail over the next few years. Our current level of FDIC insurance expense as well as any further increases thereto will adversely affect our operating results. Table of Contents We are not paying dividends on our preferred stock or common stock and are deferring distributions on our trust preferred securities, and we are restricted in otherwise paying cash dividends on our common stock. The failure to resume paying dividends on our preferred stock and trust preferred securities may adversely affect us. We historically paid cash dividends before we suspended dividend payments on our preferred and common stock and distributions on our trust preferred securities pursuant to the request of the FRB and the OCC on February 1, 2010 and January 10, 2010, respectively. The FRB, as a matter of policy, has indicated that bank holding companies should not pay dividends or make distributions on trust preferred securities using funds from the U.S Treasury s Capital Purchase Program instituted under the Troubled Asset Relief Program ( TARP Capital Purchase Program ). Dividends and distributions on trust preferred securities also are generally limited to amounts available from current earnings. We have incurred losses to date in 2010. In February 2010, the FRB, the holding company s primary regulator, informed us that we may not, without the prior approval of the FRB, pay dividends on or redeem our capital stock, pay interest on or redeem our trust preferred securities, or incur new debt and we have therefore suspended payment of dividends on our Series A Preferred Stock and the payment of interest on our trust preferred securities. Accordingly, there can be no assurance that any dividends will be paid in the future. There is no assurance that we will receive approval to resume paying cash dividends following this offering. Even if we are allowed to resume paying dividends again by the FRB and the OCC, future payment of cash dividends on our common stock, if any, will be subject to the prior payment of all accrued and unpaid dividends and deferred distributions on our Series A Preferred Stock and trust preferred securities. As of June 30, 2010, we had $790,000 of unpaid dividends owing on our preferred stock and $1,141,000 of deferred distributions owing on our trust preferred securities. Further, we need prior Treasury approval to increase our quarterly cash dividends above $0.25 per common share through the earliest of December 23, 2011, the date we redeem all shares of Series A Preferred Stock or the Treasury has transferred all shares of Series A Preferred Stock to third parties. All dividends are declared and paid at the discretion of our board of directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements and such other factors as our board of directors may deem relevant. Current and proposed regulatory requirements for increased capital and liquidity will limit our ability to pay dividends on our preferred and common stock and make distributions on our outstanding trust preferred securities. Further, dividend payments on our Series A Preferred Stock and distributions on our trust preferred securities are cumulative and therefore unpaid dividends and distributions will accrue and compound on each subsequent dividend payment date. In the event of any liquidation, dissolution or winding up of the affairs of our Company, holders of the Series A Preferred Stock shall be entitled to receive for each share of Series A Preferred Stock the liquidation amount plus the amount of any accrued and unpaid dividends. If we miss six quarterly dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. We cannot pay dividends on our outstanding shares of Series A Preferred Stock or our common stock until we have paid in full all deferred distributions on our trust preferred securities, which will require prior approval of the FRB. Accounting, Systems and Internal Control Risks Changes in accounting standards may affect our performance. Our accounting policies and procedures are fundamental to how we record and report our financial condition and results of operations. From time to time, there are changes in the financial accounting and reporting standards that govern the preparation of financial statements in accordance with GAAP. These changes can be difficult to predict and can materially impact how we record and report our financial condition and operating results. The Financial Accounting Standards Board has and continues to issue a large number of accounting standards that necessarily require all companies to exercise significant judgment and interpretation in the application of those standards. For example, banks now need to use significant judgment when assessing the estimated fair value of the assets and liabilities sitting on their balance sheets even though market values can change rapidly and may not be representative due to the inactivity of certain markets. These judgments and estimates could lead to inaccuracy and/or incomparability of financial statements in the banking industry. Future changes in financial accounting and reporting standards, including marking all our assets and liabilities to market values, could have a negative effect on our operating results and financial condition and even require us to restate prior period financial statements. The accuracy of our judgments and estimates about financial and accounting matters will impact operating results and financial condition. We necessarily make certain estimates and judgments in preparing our financial statements. The quality and accuracy of those estimates and judgments will have an impact our operating results and financial condition. For a further discussion, see the caption Critical Accounting Policies in our most recent Report on Form 10-Q, which is incorporated herein by reference. Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to accurately report our financial condition, operating results or prevent fraud. We regularly review and update our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. We maintain controls and procedures to mitigate against risks such as processing system failures and errors, and customer or employee fraud. We maintain insurance coverage for certain of these risks. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Events could occur which are not prevented or detected by our internal controls or are not insured against or are in excess of our insurance limits. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. Table of Contents A breach of information security could negatively affect our business. We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, including over the internet. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, general ledger, deposits and loans. We cannot be certain that all of our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. We also rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached, information can be lost or misappropriated and could result in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The inability to keep pace with technological changes on our part could also have a material adverse impact on our business, financial condition and operating results. We are subject to various restrictions as a result of our participation in the U.S Treasury s Capital Purchase Program. We voluntarily participated in the TARP Capital Purchase Program and we are now subject to various restrictions as defined therein, including standards for executive compensation and corporate governance for as long as the Treasury holds our Series A Preferred Stock, or any common stock that may be issued to them pursuant to the warrant they hold. These standards generally apply to our Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. This deductibility limit on executive compensation, which currently only affects our Chairman s compensation, will increase the overall after-tax cost of our compensation programs in future periods and we could potentially be subject to the above restrictions for a ten-year time period. Pursuant to the American Recovery and Reinvestment Act of 2009, further compensation restrictions, including significant limitations on incentive compensation and golden parachute payments, have been imposed on our most highly compensated employees, which may make it more difficult for us to retain and recruit qualified personnel, which could negatively impact our business, financial condition and results of operations. Regulatory restrictions on hiring, compensating and indemnifying directors and senior executive officers may adversely affect us. The OCC has, and the FRB likely will, require us to seek approval before electing any new directors or senior executive officers. Such hiring restrictions and inability to indemnify, and to pay any such persons golden parachute payments upon the termination of their service, may adversely affect our ability to attract or retain the qualified persons we need to operate our business. Risks Relating to this Offering Sales of a significant number of shares of our common stock in the public markets, or the perception of such sales, could depress the market price of our common stock. Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares could adversely affect the market price of our Class A common stock. In addition, future issuances of equity securities, including pursuant to outstanding warrants or options, could dilute the interests of our existing stockholders, including you, and cause the market price of our Class A common stock to decline. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. We cannot predict the effect that future sales of our common stock would have on the market price of our Class A common stock. Our stock price has been and is likely to be volatile, which could cause the value of our investment to decline. The trading price of our Class A common stock has been and is likely to be highly volatile and subject to wide fluctuations in price. This volatility is in response to various factors, many of which are beyond our control, including: actual or anticipated variations in quarterly operating results from historical results or estimates of results prepared by securities analysts; Table of Contents announcements of new services or products by us or our competitors; announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; conditions or trends in financial industry; additions or departures of key personnel; general economic conditions and interest rates; instability in the United States and other financial markets; sales of our common stock; earnings estimates and recommendations of securities analysts; legislative, regulatory, accounting and tax changes, including those that may require banks to hold more capital and liquidity, generally; the performance and stock price of other companies that investors and analysts deem comparable to us; regulatory enforcement action and restrictions applicable to us; the soundness or predicted soundness of other financial institutions; and the public perception of the banking industry and its safety and soundness. In addition, the stock market in general, and the NASDAQ Global Select Market and the market for commercial banks and other financial services companies in particular, has experienced significant price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. As a result of these factors, among others, the value of your investment may decline, and there is no assurance that you will be able to sell your shares of our Class A common stock at or above the offering price. We are currently restricted from and have no present plans to pay cash dividends on our common stock. We are presently subject to regulatory restrictions on our ability to pay dividends and we have no present intention to pay cash dividends on our common stock in the foreseeable future. Dividends on our common and preferred stock, if and when declared and paid by us, are subject to our financial condition and the financial condition of our subsidiaries, as well as other business considerations, including restrictions on the payment of dividends when we have deferred distributions on our outstanding trust preferred securities. We cannot pay any dividends on our common stock, unless and until we pay all outstanding unpaid distributions on our trust preferred securities and Series A preferred stock, and thereafter keep such payments current. The FRB has prohibited our payment of dividends and distributions on our stock and our trust preferred securities. Voting control of the Company is held by a limited number of stockholders, whose interests may not always be aligned with yours. As of the date of this prospectus, three stockholders, our Chairman and two members of his family, together beneficially owned approximately 24% of the outstanding Class A common stock and, after giving effect to the conversion of the shares of Class B common stock into Class A common stock, will beneficially own approximately 31% of the issued and outstanding Class A common stock. If these individuals were to act together, they could have significant influence over or control the outcome of matters submitted to a vote of our shareholders. As the interests of the controlling stockholders might not always be aligned with your interests, these persons may exercise control over us in a manner detrimental to your interests. For example, our controlling stockholders could delay, deter or prevent a change in control or other business combination that might otherwise be deemed beneficial to our other stockholders. If we fail to pay dividends on our outstanding shares of our Series A preferred stock through May, 2011, the United States Treasury will have the right to appoint two directors to our board, whose interests could conflict with or be different from those of our common shareholders or management. Table of Contents Anti-takeover provisions and the regulations to which we may be subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to our stockholders. We are a holding company incorporated in Delaware. Anti-takeover provisions in Delaware law and our restated certificate of incorporation, as amended, and bylaws, as well as regulatory approvals required under federal banking laws, could make it more difficult for a third party to acquire control of us and may prevent stockholders from receiving a premium for their shares of Class A common stock. Our restated certificate of incorporation, as amended, provides that our board of directors may issue up to 300,000 shares of preferred stock, in one or more series, without stockholder approval and with such terms, preferences, rights and privileges as the board of directors may deem appropriate, and up to 120,000 shares of our Class B common stock which, so long as at least 50,000 shares of Class B common stock are outstanding, entitles the holders thereof to vote for the election of two-thirds (rounded up to the nearest whole number) of our board of directors. In connection with, and contingent upon the completion of, a proposed registered public offering of our Class A common stock, we have agreed not to issue, or authorize the issuance of, any more shares of Class B common stock from the date of the prospectus to be used in that offering and will seek an amendment to our restated certificate of incorporation, as amended, to remove any and all references to the Class B common stock at our next annual meeting of stockholders. These provisions, the control of the Dansker family over approximately 31% of our Class A common stock after giving effect to the conversion of the shares of Class B common stock into shares of Class A common stock, and other factors may hinder or prevent a change in control, even if the change in control would be beneficial to, or sought by, our stockholders. See Description of Our Securities Certain Provisions Having Potential Anti-Takeover Effects.

parsed_sections/risk_factors/2010/CIK0000943320_trump_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our common stock involves substantial risk. You should consider carefully all of the information set forth in this prospectus and the documents incorporated by reference herein, unless expressly provided otherwise, and, in particular, the risk factors described herein, in our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequently filed Quarterly Reports on Form 10-Q, filed with the SEC and incorporated by reference into this prospectus. The risks described in any document incorporated by reference herein are not the only ones we face, but are considered to be the most material. There may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that could have material adverse effects on our future results. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Risks Related to Our Business Current conditions in the global markets and general economic pressures may adversely affect consumer spending and our business and results of operations. Our performance depends on the impact of economic conditions on levels of consumer spending. As a result of the present weak economic conditions in the United States, Europe and much of the rest of the world, the uncertainty over the duration of such weakness and the prospects for recovery, consumers are continuing to curb discretionary spending, which is having an effect on our business. An extended duration or deterioration in current economic conditions could have a further material adverse impact on our financial condition and results of operations. To operate our business and ultimately to restructure our capital structure, we will require a significant amount of cash. Our ability to satisfy our obligations and fund capital expenditures will depend on our ability to generate cash in the future, which is, in part, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. The risk is heightened by the fact that our current operations are in a single market. While additional cash for operations and capital expenditures were provided under the Plan of Reorganization, we cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in an amount sufficient to enable us to operate our business and restructure our business. These challenges are exacerbated by adverse conditions in the general economy and the tightened credit market. Our industry is intensely competitive. The gaming industry is highly competitive and is expected to become more competitive in the future. New entrants to the Atlantic City market have announced plans to develop casinos in the future. We also face competition from other forms of legalized gaming, such as state sponsored lotteries, racetracks, off-track wagering and video lottery and video poker terminals. In addition, online gaming, despite its current illegality in the United States, is a growing sector in the gaming industry. Legislation has been introduced in New Jersey and certain other states that, if passed and enacted into law, would permit certain forms of online gaming. We are unable to assess the impact that online gaming will have on our operations in the future and there is no assurance that the impact will not be materially adverse. Our success could depend upon the success of our strategic capital expenditure plan. Many of our existing competitors in Atlantic City have recently completed significant development projects. We have completed a strategic capital expenditure plan at each of our properties, which included the construction of the Chairman Tower at Trump Taj Mahal. From time to time, capital expenditures, such as room Table of Contents refurbishments, amenity upgrades and new gaming equipment, are necessary to enhance the competitiveness of our properties. Our ability to successfully compete will also be dependent upon our ability to develop and implement effective marketing campaigns. To the extent we are unable to successfully develop and implement these types of marketing initiatives, we may not be successful in competing in our market. Gaming is a regulated industry and changes in the law could have a material adverse effect on our operations. Gaming in New Jersey is regulated extensively by federal and state regulatory bodies, including the New Jersey Casino Control Commission (the CCC ) and state and federal taxing, law enforcement and liquor control agencies. We and several of our officers and other qualifiers have received the licenses, permits and authorizations required to operate our properties. In June 2007, the CCC renewed our licenses to operate Trump Taj Mahal, Trump Plaza and Trump Marina until June 2012. Failure to maintain or obtain the requisite casino licenses would have a material adverse effect on our business. See Business Regulatory and Licensing in our Annual Report on Form 10-K for the year ended December 31, 2009. If new gaming regulations are adopted in the jurisdictions in which we operate, such regulations could impose restrictions or costs that could have a significant adverse effect on us. From time to time, various proposals have been introduced by the legislature of New Jersey that, if enacted, could adversely affect the tax, regulatory, operations or other aspects of the gaming industry and our financial performance. Legislation of this type may be enacted in the future. For example, in July 2010, the Governor of New Jersey announced plans for state-appointed authority to take charge of Atlantic City s casino and entertainment district; the impact of this plan on us is not yet clear. Pennsylvania, New York and other nearby states have enacted gaming legislation that may harm us, and other states may do so in the future. In July 2004, the Pennsylvania legislature enacted the Race Horse Development and Gaming Act which authorizes the Control Board to permit a total of up to 61,000 slot machines in up to 14 different licensed locations in Pennsylvania, seven at racetracks (each with up to 5,000 slot machines), five at slot parlors (two in Philadelphia, one in Pittsburgh and two elsewhere, each with up to 5,000 slot machines) and two at established resorts (each with up to 500 slot machines). Three of the racetrack sites, Pocono Downs, Parx Casino and Chester Downs and three slot parlors, two in Philadelphia and one in Bethlehem, are located in our market area. Slot machine operations commenced in late 2006 at the racetracks and in May 2009 at the slot parlor in Bethlehem. As of early 2010, approximately 12,000 slot machines were operating at these locations. One of the Philadelphia slot parlors commenced construction in October 2009 and is expected to open in mid-2010 with approximately 1,700 slot machines. No agreement has yet been reached on who will operate the other Philadelphia facility. The transaction is contingent on approval from Pennsylvania gaming regulators. In January 2010, table game legislation was signed into Pennsylvania law which allows up to 250 table games at each of the 12 larger authorized casinos and up to 50 table games at each of the remaining two smaller authorized casinos. Pennsylvania table games became operational during July 2010. Competition from the Pennsylvania area casinos that are currently operational has adversely impacted Atlantic City casinos, including our casinos. Pennsylvania table games and the potential opening of additional Pennsylvania casinos could further adversely impact Atlantic City casinos, including our casinos. In 2001, the New York Legislature authorized the installation of video lottery terminals ( VLTs ) at various horse racing facilities in New York. The VLT facility at Yonkers Raceway opened in late 2006 and now operates 5,300 VLTs. In August 2010, the New York State Division of the Lottery recommended Genting New York LLC for a license to operate a new casino at the Aqueduct Racetrack in Queens, New York, which will feature approximately 4,500 VLTs. The transaction is contingent on approval from New York s legislature and governor. Additionally, at various times there have been discussions about allowing VLTs at the Belmont racetrack. These Table of Contents locations are less than 15 miles from Manhattan. The 2001 legislation also authorized the Governor of New York to negotiate compacts authorizing the operation of up to six Native American casino facilities, including slot machines. Three have now been located in the western part of New York and outside of our primary market area but the remaining three, if approved and developed, are required by law to be located in either Sullivan or Ulster County, adjoining counties, which are approximately 100 miles northwest of Manhattan. Additionally, the Shinnecock Indian Nation of the Southampton area of eastern Long Island was recently provisionally approved for federal recognition; the Shinnecock Indian Nation have indicated that they intend to operate a casino in their territory. Competition from the VLT facilities at Aqueduct Racetrack and Yonkers Raceway and from potential Native American casinos as may be authorized and operated in Sullivan or Ulster County could adversely impact Atlantic City casinos, including our casinos. In addition, other states near New Jersey, including Maryland, either have or are currently contemplating gaming legislation. The net effect of gaming facilities in such other states, when operational, on the Atlantic City gaming market, including our properties, cannot be predicted. Since our market is primarily a drive-in market, legalized gaming in one or more states neighboring or within close proximity to New Jersey could have a material adverse effect on the Atlantic City gaming market overall, including our properties. Other enacted legislation, including local anti-smoking regulations, may have an adverse impact on our operations. In 2006, the New Jersey Legislature adopted the New Jersey Smoke-Free Air Act. The law prohibits the smoking of tobacco in structurally enclosed indoor public places and workplaces in New Jersey, including licensed casino hotels. The law permits smoking within the perimeter of casino and casino simulcasting areas, and permits 20% of hotel guest rooms to be designated as smoking rooms. In 2007, an ordinance in Atlantic City became effective which extended smoking restrictions under the New Jersey Smoke-Free Air Act. This ordinance mandated that casinos restrict smoking to designated areas of up to 25% of the casino floor. In 2008, Atlantic City s City Council unanimously approved an amendment to the ordinance, banning smoking entirely on all casino gaming floors and casino simulcasting areas, but allowing smoking in separately exhausted, non-gaming, smoking lounges. However, Atlantic City s City Council subsequently announced that it would not consider a full smoking ban in casinos until at least the end of 2011, due to, among other things, the weakened economy and increased competition in adjoining states. Bills are pending in the New Jersey Senate and Assembly which, if enacted, would repeal the gaming area exemption from the smoking ban provided for in the New Jersey Smoke-Free Air Act. This proposed ban on smoking in the casino and casino simulcasting areas could adversely affect the Atlantic City casinos, including our casinos. We might not be successful in pursuing additional gaming ventures in existing or emerging gaming markets. We would not have the right to use the Trump brand in connection with any such additional gaming ventures. We are continuously looking to grow our business and diversify our cash flow by actively pursuing opportunities to capitalize on the Trump brand in connection with our existing properties in Atlantic City, New Jersey. In addition, we expect to explore opportunities to expand our activities and asset base in additional gaming markets. Under the terms of our Trademark License Agreement with the Trump Parties, our right to use the Trump brand and related intellectual property is limited to our three existing properties, and accordingly the Trump brand and related intellectual property would not be available for our use in connection with any other activities we may undertake in the future. Competition for gaming opportunities that are or are expected to become available in additional jurisdictions is expected to be intense, and many of our known or anticipated competitors for available gaming licenses have greater resources and economies of scale than we do. We cannot assure you that we will be successful in pursuing additional gaming ventures or developing additional gaming facilities. Table of Contents Our business is subject to a variety of other risks and uncertainties. In addition to the risk factors described above, our financial condition and results of operations could be affected by many events that are beyond our control, such as: capital market conditions that could (i) affect our ability to raise capital and access capital markets and (ii) raise our financing costs in connection with refinancing debt or pursuing other financing alternatives; war, future acts of terrorism and their impact on capital markets, the economy, consumer behavior and operating expenses; competition from existing and potential new competitors in Atlantic City and other markets (including online gaming), which is likely to increase over the next several years; regulatory changes; state tax law changes that increase our tax liability; and other risks described from time to time in periodic reports filed by us with the SEC. Occurrence of any of these risks could materially adversely affect our operations and financial condition. Furthermore, we have minimal operations, except for our ownership of TER Holdings and its subsidiaries. We depend on the receipt of sufficient funds from our subsidiaries to meet our financial obligations. The ability of our subsidiaries to make payments to TER may also be restricted by the CCC. Changes in the cost of electricity and other energy could affect our business. We are a large consumer of electricity and other energy. Accordingly, increases in energy costs, may have a negative impact on our operating results. Additionally, higher energy and gasoline prices which affect our customers may result in reduced visitation to our resorts and may have an adverse effect on our business because we are primarily a drive-in market. Our cash flows from operating activities are seasonal in nature. Spring and summer are traditionally the peak seasons for our properties, while autumn and winter are non-peak seasons. Consequently, in the past, our operating results for the quarters ending in March and December have not been as strong as for the quarters ending in June and September. Excess cash from operations during peak seasons is used, in part, to subsidize operations during non-peak seasons. Performance in non-peak seasons is usually dependent on favorable weather and the long-weekend holiday calendar. In the event that we are unable to generate excess cash in one or more peak seasons, we may not be able to subsidize operations during non-peak seasons, if necessary, which would have an adverse effect on our business. Risks Related to Our Emergence From Bankruptcy Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court. In connection with the Plan of Reorganization, we were required to prepare projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan of Reorganization and our ability to continue operations upon emergence from bankruptcy. The projections reflect numerous assumptions concerning anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results may vary from those contemplated by the projections and the variation may be material. Neither the projections nor any version of the AHC/Debtor Disclosure Statement should be considered or relied upon. Table of Contents Because our pro forma consolidated financial statements reflect preliminary fresh start accounting adjustments expected to be made upon emergence from bankruptcy, and because of the effects of the transactions that became effective pursuant to the Plan of Reorganization, financial information in the pro forma financial statements and post-emergence financial statements will not be comparable to our financial information from prior periods. Upon our emergence from bankruptcy during the third quarter of 2010, we adopted fresh start accounting, pursuant to which our reorganization value, which represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, was allocated to the fair value of assets. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets, if any, would be reflected as goodwill, which would be subject to periodic evaluation for impairment. We are currently determining the fair value of our assets and liabilities in connection with fresh start accounting. Further, under fresh start accounting, the accumulated deficit will be eliminated. In addition to fresh start accounting, our consolidated financial statements subsequent to the Consummation Date will reflect all effects of the transactions consummated on the Consummation Date pursuant to the Plan of Reorganization. Thus, our balance sheets and statements of operations data are not comparable in many respects to our consolidated balance sheets and consolidated statements of operations data for periods prior to the adoption of fresh start accounting and prior to taking into account the effects of the reorganization, and therefore the financial information incorporated by reference into this prospectus may not be indicative of future financial information. The lack of comparable historical financial information may discourage investors from purchasing our common stock, which could make it more difficult for you to sell your common stock. Because the Confirmation Order is subject to a pending appeal, any reversal, modification or vacatur of the Confirmation Order that is ordered or that may result from that appeal may materially adversely affect us and our stockholders and may result in the reversal of some or all of the transactions that were consummated pursuant to the Plan of Reorganization, possibly including the issuance of common stock on the Consummation Date. Pursuant to the Confirmation Order and the Plan of Reorganization, we emerged from Chapter 11 bankruptcy protection on the Consummation Date, at which time various transactions were consummated, including, among other things, the issuance of shares of new common stock, including all the shares of common stock covered by this Prospectus. The holders of claims arising under our pre-petition first lien credit agreement, which are entities affiliated with Icahn Partners, and our prepetition first lien agent, Beal Bank, have appealed the Confirmation Order. That appeal was filed on May 17, 2010 and is currently pending before the District Court. We believe that the appeal lacks merit and intend to vigorously contest it. In addition, following the Consummation Date, we filed a motion to dismiss the appeal in its entirety in the District Court on the grounds of equitable mootness as a result of the Plan of Reorganization becoming effective, asserting that the Plan of Reorganization involved a complex series of inextricably linked transactions, was substantially consummated, the Confirmation Order was not the subject of a stay pending appeal, and appellate relief would unravel the Plan of Reorganization, prejudice the interests of numerous parties, and be against public policy. In the event that the appeal is not dismissed in its entirety, it is possible that the District Court may reverse, modify or vacate the Confirmation Order, in whole or in part, and/or remand the matter to the Bankruptcy Court for further proceedings. Any such action could materially adversely affect us and our stockholders. While we cannot predict the nature of any such relief that might be ordered by the District Court in connection with the appeal, it is possible that such relief might include, among other things, reversal or modifications to the terms of the Amended and Restated Credit Agreement or other agreements entered into on the Consummation Date; reversal or modification of the DJT Settlement Agreement (as defined in the Plan of Reorganization); or reversal or modification of some or all of the transactions that were consummated pursuant to the Plan of Reorganization, possibly including the issuance of common stock on the Consummation Date, in which event the common stock covered by this Prospectus, including any common stock that has been purchased pursuant to this Prospectus, might cease to be outstanding. Table of Contents Other Risks Related to Our Common Stock Our principal stockholders will continue to have substantial control over us after this offering which could limit your ability to influence the outcome of key transactions, including a change of control. Our principal stockholders, directors and executive officers, and entities affiliated with them, own approximately 49.7% of the outstanding shares of our common stock. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ materially from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, we have elected to opt out of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, and we will be able to enter into such transactions with our principal stockholders. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock. We expect that our stock price will fluctuate significantly, which could cause the value of your investment to decline, and you may not be able to resell your shares at or above the price at which our common stock was purchased by the Backstop Parties under the Plan of Reorganization or the price at which you acquire your shares. Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock regardless of our operating performance. The trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including: market conditions in the broader stock market; actual or anticipated fluctuations in our quarterly financial and operating results; introduction of new products or services by us or our competitors; issuance of new or changed securities analysts reports or recommendations; investor perceptions of us and the gaming industry; sales, or anticipated sales, of large blocks of our stock; additions or departures of key personnel; regulatory or political developments; litigation and governmental investigations; and changing economic conditions. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation. Table of Contents If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our results of operations do not meet their expectations, our stock price and trading volume could decline. If a trading market for our common stock were to arise, such trading market will be influenced by the research and reports that industry or securities analysts publish about us and/or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline. There is no existing market for our common stock and we do not know if one will develop, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. There is no public market for our common stock issued pursuant to the Plan of Reorganization. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, our stockholders may have difficulty selling any shares of our common stock that they own. This may also make it more difficult for us to raise additional capital. Some provisions of Delaware law, our amended and restated certificate of incorporation ( Certificate of Incorporation ) and our amended and restated bylaws ( Bylaws ) may deter third parties from acquiring us and diminish the value of our common stock. Our Certificate of Incorporation and Bylaws provide for, among other things: restrictions on the ability of our stockholders to call a special meeting; restrictions on the ability of our stockholders to remove a director or fill a vacancy on the board of directors; our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval; the absence of cumulative voting in the election of directors; and advance notice requirements for stockholder proposals and nominations. These provisions in our Certificate of Incorporation and Bylaws may discourage, delay or prevent a transaction involving a change of control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts. We do not anticipate paying any cash dividends for the foreseeable future. We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock and the agreements governing our credit facilities prohibit our payment of dividends. As a result, capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock. Table of Contents

parsed_sections/risk_factors/2010/CIK0000944739_transwitch_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included or incorporated by reference in this prospectus, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 and the risks we have highlighted in other sections of this prospectus. The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties not presently known to us or that we currently deem immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risks Related to Our Company We have incurred significant net losses. Our net losses have been considerable for the past several years. Due to current economic conditions, we expect that our revenues will continue to fluctuate in the future and there is no assurance that we will attain positive net earnings in the future. Our net revenues may decrease. Due to current economic conditions and slowdowns in purchases of VLSI semiconductor devices, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our net revenues may decrease. Our business is characterized by short-term orders and shipment schedules, and customer orders typically can be cancelled or rescheduled without significant penalty to our customers. Because we do not have substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Future fluctuations to our operating results may also be caused by a number of factors, many of which are beyond our control. In response to anticipated long lead times to obtain inventory and materials from our foundries, we may order inventory and materials in advance of anticipated customer demand, which might result in excess inventory levels if the expected orders fail to materialize. As a result, we cannot predict the timing and amount of shipments to our customers, and any significant downturn in customer demand for our products would reduce our quarterly and annual operating results. We continue to have substantial indebtedness. As of March 31, 2010, we have approximately $7.5 million in principal amount of indebtedness outstanding in the form of our 5.45% Convertible Notes due September 30, 2011 (2011 Notes). In addition to this indebtedness, we may incur substantial additional indebtedness in the future. The level of our indebtedness, among other things, could: make it difficult for us to make payments on our 2011 Notes; make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes; limit our flexibility in planning for, or reacting to changes in, our business; and make us more vulnerable in the event of a downturn in our business. There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the 2011 Notes. The terms of our 2011 Notes permit the holders thereof to voluntarily convert their notes at any time into a certain number of shares of our common stock. We are using our available cash and cash equivalents each quarter to fund our operations, investments and financing activities. In January of 2010 we have restructured our operating expense to allow us to break-even at the rate of sales of approximately $13 million per quarter. Such rate of sales may not be sustained. Also we may incur unforeseen expenses, which will cause us to consume our available cash and cash equivalents. However, we believe that we have adequate cash and cash equivalents and other financing resources to fund our operations, and to meet our debt obligations through at least December 31, 2010. We may not be able to pay our debt and other obligations. If our cash, cash equivalents and operating cash flows are inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the 2011 Notes or our other obligations, we would be in default under their respective terms. This would permit the holders of the 2011 Notes and our other obligations to accelerate their respective maturities and could also cause defaults under any future indebtedness we may incur. Any such default or cross default would have a material adverse effect on our business, prospects, financial condition and operating results. In addition, we cannot be sure that we would be able to repay amounts due in respect of the 2011 Notes if payment of those notes were to be accelerated following the occurrence of an event of default as defined in the 2011 Notes indenture. We may seek to reduce our indebtedness by issuing equity securities, thereby causing dilution of our stockholders ownership interests. We may from time to time seek to exchange our 2011 Notes for shares of our common stock or other securities. These exchanges may take different forms, including exchange offers or privately negotiated transactions. As a result of shares of our common stock or other securities being issued upon such conversion or pursuant to such exchanges, our stockholders may experience substantial dilution of their ownership interest. The terms of the 2011 Notes include voluntary conversion provisions upon which shares of our common stock would be issued. As a result of these shares of our common stock being issued, our stockholders may experience dilution of their ownership interest. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED APRIL 20, 2010 PRELIMINARY PROSPECTUS 4,153,883 SHARES OF COMMON STOCK SUBSCRIPTION RIGHTS TO PURCHASE AN AGGREGATE OF UP TO 4,153,883 SHARES OF COMMON STOCK AT $2.40 PER SHARE We are distributing, at no charge, to holders of our common stock subscription rights to purchase up to 4,153,883 shares of our common stock. We refer to this offering as the rights offering. In the rights offering, you will receive one subscription right for each full share of common stock owned at 5:00 p.m., Eastern Time, on April 29, 2010, the record date of the rights offering. Each subscription right will entitle you to purchase 0.20 shares of our common stock at a subscription price of $2.40 per share, which we refer to as the basic subscription right. If you fully exercise all of your basic subscription rights, and other stockholders do not fully exercise their basic subscription rights, you will be entitled to exercise an over-subscription privilege to purchase a portion of the unsubscribed shares at the same price of $2.40 per share, subject to proration and subject, further, to reduction by us under certain circumstances. To the extent you properly exercise your over-subscription privilege for an amount of shares that exceeds the number of the unsubscribed shares available to you, any excess subscription payments will be returned promptly, without interest or penalty. The subscription rights will expire if they are not exercised by 5:00 p.m., Eastern Time, on [ ], 2010, but we may extend the rights offering for additional periods ending no later than [ ], 2010. Our board of directors may cancel the rights offering for any reason at any time before it expires. If we cancel the rights offering, all subscription payments received will be returned promptly, without interest or penalty. We have agreed with Computershare Trust Company, N.A. to serve as the subscription agent for the rights offering. The subscription agent will hold in escrow the funds we receive from subscribers until we complete or cancel the rights offering. We have agreed with Georgeson, Inc. to serve as information agent for the rights offering. OUR BOARD OF DIRECTORS IS NOT MAKING A RECOMMENDATION REGARDING YOUR EXERCISE OF THE SUBSCRIPTION RIGHTS. You should carefully consider whether to exercise your subscription rights before the rights offering expires. All exercises of subscription rights are irrevocable. THE PURCHASE OF SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ CAREFULLY THE SECTION ENTITLED RISK FACTORS BEGINNING ON PAGE 9 OF THIS PROSPECTUS. Our common stock is traded on The NASDAQ Capital Market under the symbol TXCC. The last reported sales price of our common stock on April 16, 2010 was $2.90 per share. The shares of common stock issued in the rights offering will also be listed on The Nasdaq Capital Market under the same ticker symbol. This is not an underwritten offering. Our shares of common stock are being offered directly by us without the services of an underwriter or selling agent. If you have any questions or need further information about this rights offering, please call Georgeson, Inc., our information agent for the rights offering, at (212) 440-9800 (call collect) or at (888) 867-6856 (toll-free). The date of this prospectus is [ ], 2010. If we seek to secure additional financing we may not be able to do so. If we are able to secure additional financing our stockholders may experience dilution of their ownership interest or we may be subject to limitations on our operations. If we are unable to generate sufficient cash flows from operations to meet our anticipated needs for working capital and capital expenditures, we may need to raise additional funds. However, events in the future may require us to seek additional capital and, if so required, that capital may not be available on terms favorable or acceptable to us, if at all. If we raise additional funds through the issuance of equity securities, our stockholders may experience dilution of their ownership interest, and the newly issued securities may have rights superior to those of our common stock. On October 21, 2009 we filed a shelf registration statement on Form S-3 (File No. 333-162609) (the Shelf Registration Statement ) which was declared effective by the Securities and Exchange Commission on October 28, 2009, to sell up to $40,000,000 of our securities. On December 31, 2009, we agreed, pursuant to a privately negotiated purchase agreement, to sell up to 1,950,000 shares of our common stock from the Shelf Registration Statement in multiple closings over the next twelve months. As of April 13, 2010, we have sold 600,000 shares of our common stock in such closings. If we raise additional funds by issuing debt, we may be limited in our success, as the terms of the 2011 Notes restrict our ability to issue debt that is senior to or pari passu with the 2011 Notes, without the consent of the holders of the 2011 Notes. We may fail to realize the anticipated benefits of the acquisition of Centillium. The success of the acquisition of Centillium depends on, among other things, our ability to realize anticipated cost savings and to combine the businesses of TranSwitch and Centillium in a manner that does not materially disrupt Centillium s existing customer relationships or otherwise result in decreased revenues, and that allows us to capitalize on Centillium s growth opportunities. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected. It is possible that the ongoing integration process could result in the loss of key employees, the disruption of our or Centillium s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisition. Our failure to continue to operate and manage the combined company effectively could have a material adverse effect on our business, financial condition and operating results. We will need to meet significant challenges to realize the expected benefits and synergies of the acquisition of Centillium. These challenges include: integrating the management teams, strategies, cultures and operations of the two companies; retaining and assimilating the key personnel of each company; integrating sales and business development operations; retaining existing customers of each company; developing new products and services that utilize the technologies and resources of both companies; and creating uniform standards, controls, procedures, policies and information systems. The accomplishment of these objectives will involve considerable risk, including: the potential disruption of each company s ongoing business and distraction of their respective management teams; the difficulty of incorporating acquired technology and rights into our products and services; unanticipated expenses related to technology integration; and potential unknown liabilities associated with the acquisition. If we do not succeed in addressing these challenges or any other problems encountered in connection with the acquisition, our operating results and financial condition could be adversely affected. Our stock price is volatile. The market for securities for communication semiconductor companies, including our Company, has been highly volatile. The daily closing price of our common stock has fluctuated between a low of $1.60 and a high of $22.72 (share price is reflective of the November 23, 2009 1 for 8 reverse stock split) during the period from January 1, 2006 to April 9, 2010. It is likely that the price of our common stock will continue to fluctuate widely in the future. Factors affecting the trading price of our common stock include: responses to quarter-to-quarter variations in operating results; announcements of technological innovations or new products by us or our competitors; current market conditions in the telecommunications and data communications equipment markets; and changes in earnings estimates by analysts. We may have to further restructure our business. We may have to make further restructuring changes if we do not sustain the current level of quarterly revenues. We anticipate that shipments of our products to relatively few customers will continue to account for a significant portion of our total net revenues. Historically, a relatively small number of customers have accounted for a significant portion of our total net revenues in any particular period. For the years ended December 31, 2009 and 2008, shipments to our top five customers, including sales to distributors, accounted for approximately 63% and 51% of our total net revenues, respectively. We expect that a limited number of customers may account for a substantial portion of our total net revenues for the foreseeable future. Some of the following may reduce our total net revenues or adversely affect our business: reduction, delay or cancellation of orders from one or more of our significant customers; development by one or more of our significant customers of other sources of supply for current or future products; loss of one or more of our current customers or a disruption in our sales and distribution channels; and failure of one or more of our significant customers to make timely payment of our invoices. We cannot be certain that our current customers will continue to place orders with us, that orders by existing customers will return to the levels of previous periods or that we will be able to obtain orders from new customers. We have no long-term volume purchase commitments from any of our significant customers. The cyclical nature of the communication semiconductor industry affects our business. Communication service providers, internet service providers, regional operating companies and inter-exchange carriers continue to closely monitor their capital expenditures. Spending on voice-only equipment remains slow while spending on equipment providing the efficient transport of data services on existing infrastructure appears to be slowly recovering. Demand for new, high bandwidth applications such as video conferencing, broadband audio and telephone is placing an increased burden on existing public network infrastructure. We cannot be certain that the market for our products will not decline in the future. Because of our lack of diversity in geographic sources of revenues, economic factors specific to certain countries may adversely affect our business and operating results. During 2009, a substantial amount of our revenue was from, China, Japan, Korea, Israel and other foreign countries. We expect revenues in 2010 will be substantial concentrated in foreign markets. All of our sales have been historically denominated in U.S. dollars and major fluctuations in currency exchange rates could materially affect our customers demand, thereby causing them to reduce their orders, which could adversely affect our operating results. While part of our strategy is to diversify the geographic sources of our revenues, failure to further penetrate other markets could harm our business and results of operations and subject us to increased currency risk. If foreign exchange rates fluctuate significantly, our profitability may decline. We are exposed to foreign currency rate fluctuations because we incur a significant portion of our operating expenses in currencies other than U.S. dollars (mainly Indian rupees, Israeli shekels and Euros). The U.S. dollar has devalued significantly and this trend may continue. Our international business operations expose us to a variety of business risks. Foreign markets are a significant part of our net product revenues. For the years ended December 31, 2009 and December 31, 2008 foreign shipments accounted for approximately 70% and 85%, respectively of our total net product and services revenues. We expect foreign markets to continue to account for a significant percentage of our total net product revenues. A significant portion of our total net product revenues will, therefore, be subject to risks associated with foreign markets, including the following: unexpected changes in legal and regulatory requirements and policy changes affecting the telecommunications and data communications markets; changes in tariffs; exchange rates, currency controls and other barriers; political and economic instability; risk of terrorism; difficulties in accounts receivable collection; difficulties in managing distributors and representatives; difficulties in staffing and managing foreign operations; difficulties in protecting our intellectual property overseas; natural disasters; seasonality of customer buying patterns; and potentially adverse tax consequences. Although substantially all of our total net product revenues to date have been denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign currencies also may reduce our total net revenues from foreign customers. With the acquisition of our Israeli operations and the expansion of our India Design Center a substantial amount of our costs are denominated in Israeli shekels and the Indian rupee. To the extent that we further expand our international operations or change our pricing practices to denominate prices in foreign currencies, we will expose our margins to increased risks of currency fluctuations. Our net product revenues depend on the success of our customers products, and our design wins do not necessarily generate revenues in a timely fashion. Our customers generally incorporate our new products into their products or systems at the design stage. However, customer decisions to use our products (design wins), which can often require significant expenditures by us without any assurance of success, often precede the generation of production revenues, if any, by a year or more. Some customer projects are canceled, and thus will not generate revenues for our products. In addition, even after we achieve a design win, a customer may require further design changes. Implementing these design changes can require significant expenditures of time and expense by us in the development and pre-production process. Moreover, the value of any design win will largely depend upon the commercial success of the customer s product and on the extent to which the design of the customer s systems accommodates components manufactured by our competitors. We cannot ensure that we will continue to achieve design wins in customer products that achieve market acceptance. Further, most revenue-generating design wins take several years to translate into meaningful revenues. We must successfully transition to new process technologies to remain competitive. Our future success depends upon our ability to develop products that utilize new process technologies. Semiconductor design and process methodologies are subject to rapid technological change and require large expenditures for research and development. We currently manufacture our products using 0.8, 0.5, 0.35, 0.25, 0.18 and 0.13 micron and 65 nanometer complementary metal oxide semiconductor (CMOS) processes. We continuously evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. Other companies in the industry have experienced difficulty in transitioning to new manufacturing processes and, consequently, have suffered increased costs, reduced yields or delays in product deliveries. We believe that transitioning our products to smaller geometry process technologies will be important for us to remain competitive. We cannot be certain that we can make such a transition successfully, if at all, without delay or inefficiencies. Our success depends on the timely development of new products, and we face risks of product development delays. Our success depends upon our ability to develop new VLSI devices and software for existing and new markets. The development of these new devices and software is highly complex, and from time to time we have experienced delays in completing the development of new products. Successful product development and introduction depends on a number of factors, including the following: accurate new product definition; timely completion and introduction of new product designs; availability of foundry capacity; achievement of manufacturing yields; and market acceptance of our products and our customers products. Our success also depends upon our ability to do the following: build products to applicable standards; develop products that meet customer requirements; adjust to changing market conditions as quickly and cost-effectively as necessary to compete successfully; introduce new products that achieve market acceptance; and develop reliable software to meet our customers application needs in a timely fashion. In addition, we cannot ensure that the systems manufactured by our customers will be introduced in a timely manner or that such systems will achieve market acceptance. We sell a range of products that each has a different gross profit. Our total gross profits will be adversely affected if most of our shipments are of products with low gross profits. We currently sell more than 60 products. Some of our products have a high gross profit while others do not. If our customers decide to buy more of our products with low gross profits and fewer of our products with high gross profits, our total gross profits could be adversely affected. We plan our mix of products based on our internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The price of our products tends to decrease over the lives of our products. Historically, average selling prices in the communication semiconductor industry have decreased over the life of a product, and, as a result, the average selling prices of our products may decrease in the future. Decreases in the price of our products would adversely affect our operating results. As global competition increases our customers are increasingly more focused on price. We may have to decrease our prices to remain competitive in some situations, which may negatively impact our gross margins. Our success depends on the rate of growth of the global communications infrastructure. We derive virtually all of our total net revenues from products for telecommunications, data and video communications applications. These markets are characterized by the following: susceptibility to seasonality of customer buying patterns; subject to general business cycles; intense competition; rapid technological change; and short product life cycles. We anticipate that these markets will continue to experience significant volatility in the near future. Our products must successfully include industry standards to remain competitive. Products for telecommunications and data communications applications are based on industry standards, which are continually evolving. Our future success will depend, in part, upon our ability to successfully develop and introduce new products based on emerging industry standards, which could render our existing products unmarketable or obsolete. If the telecommunications or data communications markets evolve to new standards, we cannot be certain that we will be able to design and manufacture new products successfully that address the needs of our customers and include the new standards or that such new products will meet with substantial market acceptance. Our intellectual property indemnification practices may adversely impact our business. We have historically agreed to indemnify our customers for certain costs and damages of intellectual property rights in circumstances where one of our products is the factor creating the customer s infringement exposure. This practice may subject us to significant indemnification claims by our customers. In some instances, our products are designed for use in devices manufactured by our customers that comply with international standards. These international standards are often covered by patent rights held by third parties, which may include our competitors. The costs of obtaining licenses from holders of patent rights essential to such international standards could be high. The cost of not obtaining such licenses could also be high if a holder of such patent rights brings a claim for patent infringement. We are not aware of any claimed violations on our part. However, we cannot assure you that claims for indemnification will not be made or that if made, such claims would not have a material adverse effect on our business, results of operations or financial condition. We continue to expense our new product process development costs when incurred. In the past, we have incurred significant new product and process development costs because our policy is to expense these costs, including tooling, fabrication and pre-production expenses, at the time that they are incurred. We may continue to incur these types of expenses in the future. These additional expenses will have a material and adverse effect on our operating results in future periods. We face intense competition in the communication semiconductor market. The communication semiconductor industry is intensely competitive and is characterized by the following: rapid technological change; subject to general business cycles; price erosion; limited access to fabrication capacity; unforeseen manufacturing yield problems; and heightened international competition in many markets. These factors are likely to result in pricing pressures on our products, thus potentially affecting our operating results. Our ability to compete successfully in the rapidly evolving area of high-performance integrated circuit technology depends on factors both within and outside our control, including: success in designing and subcontracting the manufacture of new products that implement new technologies; protection of our products by effective use of intellectual property laws; product quality; reliability; price; efficiency of production; failure to find alternative manufacturing sources to produce VLSI devices with acceptable manufacturing yields; the pace at which customers incorporate our products into their products; success of competitors products; and general economic conditions. The telecommunications and data communications industries, which are our primary target markets, have become intensely competitive because of deregulation, heightened international competition and significant decreases in demand since 2000. A number of our customers have internal semiconductor design or manufacturing capability with which we also compete in addition to our other competitors. Any failure by us to compete successfully in these target markets, particularly in the communications markets, would have a material adverse effect on our business, financial condition and results of operations. We rely on outside fabrication facilities, and our business could be hurt if our relationships with our foundry suppliers are damaged. We do not own or operate a VLSI circuit fabrication facility. Four foundries currently supply us with all of our semiconductor device requirements. While we have had good relations with these foundries, we cannot be certain that we will be able to renew or maintain contracts with them or negotiate new contracts to replace those that expire. In addition, we cannot be certain that renewed or new contracts will contain terms as favorable as our current terms. There are other significant risks associated with our reliance on outside foundries, including the following: the lack of assured semiconductor wafer supply and control over delivery schedules; the unavailability of, or delays in obtaining access to, key process technologies; and limited control over quality assurance, manufacturing yields and production costs. Reliance on third-party fabrication facilities limits our ability to control the manufacturing process. Manufacturing integrated circuits is a highly complex and technology-intensive process. Although we try to diversify our sources of semiconductor device supply and work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries occasionally experience lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. Such reduced manufacturing yields have at times reduced our operating results. A manufacturing disruption at one or more of our outside foundries, including, without limitation, those that may result from natural disasters, accidents, acts of terrorism or political instability or other natural occurrences, could impact production for an extended period of time. Our dependence on a small number of fabrication facilities exposes us to risks of interruptions in deliveries of semiconductor devices. We purchase semiconductor devices from outside foundries pursuant to purchase orders, and we do not have a guaranteed level of production capacity at any of our foundries. We provide the foundries with forecasts of our production requirements. However, the ability of each foundry to provide wafers to us is limited by the foundry s available capacity and the availability of raw materials. Therefore, our foundry suppliers could choose to prioritize capacity and raw materials for other customers or reduce or eliminate deliveries to us on short notice. Accordingly, we cannot be certain that our foundries will allocate sufficient capacity to satisfy our requirements. We have been, and expect in the future to be, particularly dependent upon a limited number of foundries for our VLSI device requirements. In 2009, approximately 85% of our wafer requirements were manufactured by one foundry. The time required to qualify alternative manufacturing sources for existing or new products could be substantial and we might not be able to find alternative manufacturing sources able to produce our VLSI devices with acceptable manufacturing yields. As a result, we expect that we could experience substantial delays or interruptions in the shipment of our products if there was a sudden increase in demand or if our foundry suppliers were to cease operations or limit our capacity. We are subject to risks arising from our use of subcontractors to assemble our products. Contract assembly houses in Asia assemble all of our semiconductor products. Raw material shortages, natural disasters, political and social instability, service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional or alternative sources of supply or assembly. This could lead to supply constraints or product delivery delays. Our failure to protect our proprietary rights, or the costs of protecting these rights, may harm our ability to compete. Our success depends in part on our ability to obtain patents and licenses and to preserve other intellectual property rights covering our products and development and testing tools. To that end, we have obtained certain domestic and foreign patents and intend to continue to seek patents on our inventions when appropriate. The process of seeking patent protection can be time consuming and expensive. We cannot ensure the following: that patents will be issued from currently pending or future applications; that our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us; that foreign intellectual property laws will protect our foreign intellectual property rights; and that others will not independently develop similar products, duplicate our products or design around any patents issued to us. Intellectual property rights are uncertain and adjudication of such rights involves complex legal and factual questions. We may be unknowingly infringing on the proprietary rights of others and may be liable for that infringement, which could result in significant liability for us. We occasionally receive correspondence from third parties alleging infringement of their intellectual property rights. If we are found to infringe the proprietary rights of others, we could be forced to either seek a license to the intellectual property rights of others or alter our products so that they no longer infringe the proprietary rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. We are responsible for any patent litigation costs. If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings in the United States Patent and Trademark Office or in the United States or foreign courts to determine any or all of the following issues: patent validity, patent infringement, patent ownership or inventorship. These types of proceedings may be costly and time consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain a license, if available, or stop making a certain product. From time to time we may prosecute patent litigation against others and as part of such litigation, other parties may allege that our patents are not infringed, are invalid and are unenforceable. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Such parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these parties. The loss of key management could affect our ability to run our business. Our success depends largely upon the continued service of our executive officers and technical personnel and on our ability to continue to attract, retain and motivate other qualified personnel. We may engage in acquisitions that may harm our operating results, dilute our stockholders and cause us to incur debt or assume contingent liabilities. We may pursue acquisitions from time to time that could provide new technologies, skills, products or service offerings. Future acquisitions by us may involve the following: use of significant amounts of cash and cash equivalents; potentially dilutive issuances of equity securities; and incurrence of debt or amortization expenses related to intangible assets with definitive lives. In addition, acquisitions involve numerous other risks, including: diversion of management s attention from other business concerns; risks of entering markets in which we have no or limited prior experience; and unanticipated expenses and operational disruptions while acquiring and integrating new acquisitions. From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies and businesses. We currently have no commitments or agreements with respect to any such acquisition. If such an acquisition does occur, we cannot be certain that our business, operating results and financial condition will not be materially adversely affected or that we will realize the anticipated benefits of the acquisition. We have made, and may continue to make, investments in development stage companies, which may not produce any returns for us in the future. From time to time we have made investments in early stage venture-backed, start-up companies that develop technologies that are complementary to our product roadmap. In April 2003, we made an initial investment in Opulan Technologies Corp. (Opulan). Opulan develops high performance and cost-effective IP convergence ASSPs from its development facility in Shanghai, China. We plan to continue to use our cash to make selected investments in these types of companies. Certain companies in which we invested in the past have failed, and we have lost our entire investment in them. These investments involve all the risks normally associated with investments in development stage companies. As such, there can be no assurance that we will receive a favorable return on these or any future venture-backed investments that we may make. Additionally, our original and any future investments may continue to become impaired if these companies do not succeed in the execution of their business plans. Any further impairment or equity losses in these investments could negatively impact our future operating results. We could be subject to class action litigation due to stock price volatility, which if it occurs, will distract our management and could result in substantial costs or large judgments against us. In the past, securities and class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management s attention and resources, which could cause serious harm to our business, operating results and financial condition or dilution to our stockholders. Provisions of our certificate of incorporation, by-laws, stockholder rights plan and Delaware law may discourage takeover offers and may limit the price investors would be willing to pay for our common stock. Delaware corporate law contains, and our certificate of incorporation and by-laws and stockholder rights plan contain, certain provisions that could have the effect of delaying, deferring or preventing a change in control of our Company even if a change of control would be beneficial to our stockholders. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions: authorize the issuance of blank check preferred stock (preferred stock which our Board of Directors can create and issue without prior stockholder approval) with rights senior to those of common stock; prohibit stockholder action by written consent; establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; and dilute stockholders who acquire more than 15% of our common stock. Natural disasters or acts of terrorism affecting our locations, or those of our suppliers, in the United States or internationally may negatively impact our business. We operate our businesses in the United States and internationally, including the operation of a design center in India, and sales, design and engineering operations in Israel. Some of the countries in which we operate or in which our customers are located have in the past been subject to terrorist acts and could continue to be subject to acts of terrorism. In addition, some of these areas may be subject to natural disasters, such as earthquakes or floods. If our facilities, or those of our suppliers or customers, are affected by a natural disaster or terrorist act, our employees could be injured and those facilities damaged, which could lead to loss of skill sets and affect the development or fabrication of our products, which could lead to lower short and long-term revenues. In addition, natural disasters or terrorist acts in the areas in which we operate or in which our customers or suppliers operate could lead to delays or loss of business opportunities, as well as changes in security and operations at those locations, which could increase our operating costs. Our ability to sublease excess office space may adversely affect our future cash outflows. We have outstanding operating lease commitments of approximately $28.0 million, payable over the next eight years. Some of these commitments are for space that is not being utilized and, for which, we recorded restructuring charges in prior periods. We are in the process of trying to sublease additional excess space but it is unlikely that any sublease income generated will offset the entire future commitment. As of December 31, 2009, we have sublease agreements totaling approximately $12.0 million to rent portions of our excess facilities over the next five years. We currently believe that we can fund these lease commitments in the future; however, there can be no assurances that we will not be required to seek additional capital or provide additional guarantees or collateral on these obligations. Of the office space being leased in our Shelton, Connecticut location, as of December 31, 2009 approximately 118,335 square feet is considered excess for which we have taken restructuring charges in prior years. Substantially all of this space is currently being sublet, but not for the full term that we are committed to under our lease agreements. If we are unable to re-lease this space, at similar rates, our future cash outflows would be adversely affected. Our business could be harmed if we fail to integrate future acquisitions adequately. During the past four years, we have acquired three companies, one based in the United States and two in Israel. Our management must devote time and resources to the integration of the operations of any future acquisitions. The process of integrating research and development initiatives, computer and accounting systems and other aspects of the operations of any future acquisitions presents a significant challenge to our management. This is compounded by the challenge of simultaneously managing a larger and more geographically dispersed entity. Future acquisitions could present a number of additional difficulties of integration, including: difficulties in integrating personnel with disparate business backgrounds and cultures; difficulties in defining and executing a comprehensive product strategy; and difficulties in minimizing the loss of key employees of the acquired company. If we delay integrating or fail to integrate operations or experience other unforeseen difficulties, the integration process may require a disproportionate amount of our management s attention and financial and other resources. Our failure to address these difficulties adequately could harm our business or financial results, and we could fail to realize the anticipated benefits of the transaction. We have in the past, as a result of industry conditions, later discontinued or abandoned certain product lines acquired through prior acquisitions. Risks Related to the Rights Offering The market price of our common stock is volatile and may decline before or after the subscription rights expire in the rights offering. The market price of our common stock could be subject to wide fluctuations in response to numerous factors, some of which are beyond our control. These factors include, among other things: responses to quarter-to-quarter variations in operating results; announcements of technological innovations or new products by us or our competitors; current market conditions in the telecommunications and data communications equipment markets; and changes in earnings estimates by analysts. Once you exercise your subscription rights, you may not revoke them. We cannot assure you that the market price of our common stock will not decline after you elect to exercise your subscription rights. If you exercise your subscription rights and, afterwards, the public trading market price of our shares of common stock decreases below the subscription price, you will have committed to buying shares of our common stock at a price above the prevailing market price and could have an immediate unrealized loss. Our common stock is traded on The Nasdaq Capital Market under the symbol TXCC, and the last reported sales price of our common stock on The Nasdaq Capital Market on April 9, 2010 was $2.87 per share. Moreover, we cannot assure you that following the exercise of your subscription rights you will be able to sell your shares of common stock at a price equal to or greater than the subscription price. Until shares are delivered upon expiration of the rights offering, you will not be able to sell shares that you purchase in the rights offering. The subscription price determined for the rights offering is not necessarily an indication of the fair value of our common stock. The per share subscription price is not necessarily related to our book value, tangible book value, multiple of earnings or any other established criteria of fair value and may or may not be considered the fair value of our common stock to be offered in the rights offering. After the date of this prospectus, our shares of common stock may trade at prices below the subscription price. If you do not exercise your subscription rights, your percentage ownership in TranSwitch will be diluted. Assuming we sell the full amount of shares issuable in connection with the rights offering, we will issue approximately [ ] shares of our common stock. If you choose not to exercise your basic subscription rights and you do not exercise your over-subscription privilege prior to the expiration of the rights offering, your relative ownership interest in our common stock will be diluted. We may cancel the rights offering at any time without further obligation to you. We may, in our sole discretion, cancel the rights offering before it expires. If we cancel the rights offering, neither we nor the subscription agent will have any obligation to you with respect to the rights except to return any payment received by the subscription agent, without interest, as soon as practicable. You will not be able to sell the shares you buy in the rights offering until you receive your stock certificates, DRS statement or your account is credited with the common stock. If you purchase shares in the rights offering by submitting a rights certificate and payment, we will mail you a stock certificate or DRS statement as soon as practicable after [ ], 2010, or such later date as to which the rights offering may be extended. If your shares are held by a broker, dealer, custodian bank or other nominee and you purchase shares, your account with your nominee will be credited with the shares of our common stock you purchased in the rights offering as soon as practicable after the expiration of the rights offering, or such later date as to which the rights offering may be extended. Until your stock certificates or DRS statement have been delivered or your account is credited, you may not be able to sell your shares even though the common stock issued in the rights offering will be listed for trading on The Nasdaq Capital Market. The stock price may decline between the time you decide to sell your shares and the time you are actually able to sell your shares. The rights offering does not require a minimum amount of proceeds for us to close the offering, which means that if you exercise your rights, you may acquire additional shares of common stock in us when we do not have enough capital to execute our business strategy in the long term. There is no minimum amount of proceeds required to complete the rights offering and your exercise of your subscription rights is irrevocable. Therefore, if you exercise your basic subscription rights or the over-subscription privilege, but we do not sell the entire amount of securities being offered in this rights offering, you may be investing in a company that does not have sufficient capital to execute its business strategy.

parsed_sections/risk_factors/2010/CIK0000946090_capital_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our shares of common stock involves a number of risks. You should consider carefully the risks described below in evaluating an investment in the shares of common stock. If any of the events in the following risks actually occurs, or if additional risks and uncertainties not presently known to us or that we believe are immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected. In addition, the trading price of our shares of common stock could decline due to any of the events described in these risks. Risks Related to Our Business We are subject to restrictions and conditions of the Cease and Desist Orders issued by the FDIC and the Commissioner, and the New FRB Agreement. We have incurred and expect to continue to incur significant additional regulatory compliance expense in connection with these enforcement actions. Failure to comply with the Cease and Desist Orders or the New FRB Agreement could result in additional enforcement action against us, including the imposition of further operating restrictions and monetary penalties. The FDIC and the Commissioner have issued the Cease and Desist Orders against First Mariner Bank and the Company has entered into the FRB Agreement and the New FRB Agreement. The September Order contains a number of significant directives, including higher capital requirements, requirements to reduce the level of our classified assets, operating restrictions and restrictions on dividend payments by the Bank. These restrictions may impede our ability to operate our own business. If we fail to comply with the terms and conditions of the Cease and Desist Orders or the New FRB Agreement, the appropriate regulatory authority could take additional enforcement action against us, including the imposition further operating restrictions and monetary penalties. We could also be directed to seek a merger partner. We have incurred and expect to continue to incur significant additional regulatory compliance expense in connection with the enforcement actions, and we will incur ongoing expenses attributable to compliance with the terms of the enforcement actions. Although we do not expect it, it is possible regulatory compliance expenses related to the enforcement actions could have a material adverse impact on us in the future. In addition, our ability to independently make certain changes to our business is restricted by the terms of the September Order and the New FRB Agreement, which could negatively impact the scope and flexibility of our business activities. While we believe that we will be able to take actions that will result in the Cease and Desist Orders and the New FRB Agreement being terminated in the future, we cannot guarantee that such actions will result in the termination of the Cease and Desist Orders and/or the New FRB Agreement. Further, the imposition of the Cease and Desist Orders and the New FRB Agreement may make it more difficult to attract and retain qualified employees. For more information on the Cease and Desist Orders and the New FRB Agreement, see "Summary Recent Operational Challenges Cease and Desist Orders and Federal Reserve Board Agreement." As of September 30, 2009, the Bank's capital levels were not sufficient to achieve compliance with the higher capital requirements we must meet by June 30, 2010, nor were they, on a consolidated basis, sufficient to satisfy the FRB's minimum capital requirements. When combined with the assets and liabilities that we are selling or of which we are otherwise disposing, the amount of capital we are raising may not be sufficient to achieve and maintain compliance with the capital requirements mandated by our regulators. The failure to meet these capital requirements could result in further action by our regulators. In the September Order, the FDIC and the Commissioner directed the Bank to raise its tier 1 leverage and total risk-based capital ratios to 6.5% and 10%, respectively, by March 31, 2010 and to 7.5% and 11%, respectively, by June 30, 2010. At September 30, 2009, we did not meet these requirements and would have needed approximately $27.0 million in additional capital, based on assets at such date, to meet these requirements. This does not take into account the impact of the December 15, 2009 sale of Mariner Finance described in "Summary Sale of Mariner Finance." First Table of Contents Mariner currently does not have any capital available to invest in the Bank and any further increases to our allowance for loan losses and operating losses would negatively impact our capital levels and make it more difficult to achieve the capital levels directed by the FDIC and the Commissioner. On a pro forma basis, based on assets as of September 30, 2009, including the sale of Mariner Finance and assuming the completion of the stock offering at the minimum of the offering range, the Bank's tier 1 leverage and total risk-based capital ratios are expected to be 7.0% and 10.4%, respectively; at the maximum of the offering range, the Bank's tier 1 leverage and total risk-based capital ratios are expected to be 7.8% and 11.4%, respectively. Therefore, on a pro forma basis as described above, while completing the stock offering at the minimum of the offering range would not satisfy the September Order's higher capital requirements required to be achieved by March 31, 2010 or June 30, 2010, completing the offering at the maximum point of the offering range would satisfy the September Order's higher capital requirements required to be achieved by March 31, 2010 and June 30, 2010. Further, the capital plan we submitted to the FDIC and the Commissioner contemplates that we will raise at least $20.0 million of capital by March 31, 2010. This element of our capital plan would only be satisfied if the stock offering is completed at the maximum of the offering range. Therefore, if we do not raise at least $20.0 million in the stock offering by March 31, 2010, or, if we do not meet September Order's higher capital requirements required to achieved by June 30, 2010, we may need to undertake additional efforts to raise capital, or seek and obtain a waiver from these requirement from the FDIC and the Commissioner. If we cannot meet capital requirements within the proscribed timeframes and we were not granted a waiver of such requirements, the FDIC and the Commissioner could take additional enforcement action against us, including the imposition of monetary penalties, as well as further operating restrictions. The FDIC or the Commissioner could direct us to seek a merger partner or possibly place the Bank in receivership. If the Bank is placed into receivership, the Company would cease operations and liquidate or seek bankruptcy protection. If the Company were to liquidate or seek bankruptcy protection, we do not believe that there would be assets available to holders of the capital stock of the Company. Additionally, on November 24, 2009, First Mariner's primary regulator, the FRB, required the Company to enter into the New FRB Agreement. In accordance with the requirements of the New FRB Agreement, the Company has submitted a written plan to maintain sufficient capital at the holding company level, such that First Mariner satisfies the FRB's minimum capital requirements. As of the date of this document, the FRB is reviewing the Company's capital plan. To satisfy these requirements, First Mariner's consolidated tier 1 capital to total assets, tier 1 capital to risk-weighted assets and total capital to risk-weighted assets ratios at September 30, 2009 must be at least 4.0%, 4.0% and 8.0%, respectively. As of September 30, 2009, the Company's consolidated capital ratios did not meet the FRB's minimum capital requirements. However, on a pro forma basis at September 30, 2009, the Exchange would increase the Company's consolidated ratios of tier 1 capital to total assets, tier 1 capital to risk-weighted assets and total capital to risk-weighted assets from 2.4%, 2.7% and 5.4%, respectively, to 4.2%, 4.8% and 8.8%, respectively. Including the sale of Mariner Finance and assuming (1) the completion of the Exchange and (2) the completion of the stock offering at the minimum and the maximum of the offering range, First Mariner's consolidated tier 1 capital to total assets, tier 1 capital to risk-weighted assets and total capital to risk-weighted assets ratios would be 5.2%, 5.9% and 9.6%, and 6.1%, 6.9% and 10.4%. Assuming only the completion of the stock offering (and including the sale of Mariner Finance, but not the completion of the Exchange), these capital ratios would be 3.3%, 3.8% and 7.6%, and 4.3%, 4.9% and 9.7%, respectively, at the minimum and maximum of the offering range. See "Capitalization." If the Company does not satisfy the requirements of the written plan it has submitted to the FRB (once it is approved by the FRB), the FRB could take additional enforcement action against us, including the imposition of monetary penalties, as well as further operating restrictions. Table of Contents If the amount of capital we raise in the stock offering and the other actions we are taking to reduce assets is insufficient to satisfy these capital requirements, we may need to take additional actions to reduce the amounts of our assets and liabilities, or we may need to raise additional capital through a share issuance in the future that would dilute your ownership if you did not, or were not permitted to, invest in the additional issuances. Should we in the future need to raise additional capital, we might seek to do so through one or more offerings of our common stock, securities convertible into common stock, or rights to acquire such securities of our common stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time and on our financial performance. Our stock price has declined in recent periods and was $1.41 at February 12, 2010. Moreover, the volatility and disruption in the capital and credit markets have reached unprecedented levels, producing downward pressure on stock prices and credit availability for numerous issuers. If current levels of market disruption and volatility continue or worsen, and if our stock price remains at its current level, we may be unable to raise additional capital, or we may be able to raise capital only at prices that would be unfavorable and dilutive to our shareholders. If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject First Mariner Bank to further regulatory enforcement action. Under our Articles, we have additional authorized shares of common stock and preferred stock that we can issue from time to time at the discretion of our board of directors, without further action by the shareholders, except where shareholder approval is required by law or NASDAQ Global Market requirements. The issuance of any additional shares of common stock or convertible securities could be substantially dilutive to shareholders of our common stock, particularly those who are not able to or choose not to participate in such additional issuances. Holders of our shares of common stock have no preemptive rights that entitle them to purchase their pro-rata share of any offering of shares of any class or series and, therefore, our shareholders may not be permitted to invest in future issuances of our common stock and as a result will be diluted. In the event stockholders do not approve the Exchange or the Exchange otherwise is not completed, the Company would not achieve the increase in stockholders' equity expected to result from the Exchange. The Company has entered into an agreement to effect the Exchange, pursuant to which the Company will acquire trust preferred securities with an aggregate liquidation amount of $20.0 million from the Investor in exchange for consideration consisting of shares of Company common stock valued at $2.0 million and warrants to buy Company common stock. If completed, the Exchange is expected to increase stockholders' equity by approximately $12.8 million. Completion of the Exchange is subject to the approval of the Company's stockholders under the Nasdaq Marketplace Rules, as well as other customary closing conditions. In the event stockholders do not approve the Exchange or the Exchange otherwise is not completed, the Company would not achieve the increase in stockholders' equity expected to result from the Exchange. We have taken actions, and may take additional actions, to help us meet immediate needs for capital, including reducing our assets and liabilities. The disposition of our assets and liabilities could hurt our long-term profitability. As further described under "Summary Recent Developments Reduction of First Mariner Long-Term Debt," on February 3, 2010, the Company entered into the Exchange Agreement with the Investor. If approved by shareholders, the Exchange will result in the elimination of subordinated debentures underlying $20.0 million aggregate liquidation amount of trust preferred securities issued by First Mariner Capital Trusts II, IV and VIII. On December 14, 2009, First Mariner consummated the Table of Contents sale of its equity interests in Mariner Finance to MF Raven Holdings, Inc. pursuant to the Contribution Agreement. At the closing, the Company exchanged its equity interests in Mariner Finance for 50 shares of common stock of JV Corp, valued at $675,000, and approximately $10.02 million in cash , of which $1.05 million will be held in escrow for up to 18 months to cover any indemnification obligations that the Company may have under the Contribution Agreement. The amount of the Cash Consideration is subject to possible adjustment based on the net assets of Mariner Finance at the time of the closing, which should be determined within 90 days of the closing. While this transaction provided First Mariner with $10.0 million in cash to invest in the Bank to increase the Bank's capital, as a result of the transaction, we will now realize only 5% of any income generated by Mariner Finance. During the nine months ended September 30, 2009, we realized a net loss of $8.97 million (including the loss on sale of $10.6 million) from the operations of Mariner Finance. For the years ended December 31, 2008 and 2007, we earned $2.8 million and $2.7 million of net income from our investment in Mariner Finance. We have identified branches that we intend to offer for sale in 2010. The successful completion of these actions is expected to reduce overhead costs by approximately $3.0 million and support our strategy of prudently reducing assets and liabilities. Total aggregate deposits in the branches identified for sale and closure are approximately $50.0 million. The Bank has not entered into any agreement to sell any branch office and no guarantee can be made that any such agreement will be entered into and if such agreement is entered into, whether such sale will be consummated. The approval of the FDIC and the Commissioner will also need to be obtained by any acquirer before buying any of our branch offices. While we anticipate that such approvals would be received, there can be no guarantee that such approvals will be received. While these branch sales, if completed, will reduce our assets and liabilities and thereby increase our Bank capital ratios, we expect that our net income in the future will be reduced as a result of the loss of income generated by these branches. The Company and the Bank are deemed to be in "troubled condition" within the meaning of federal statutes and regulations. The Company and Bank are deemed to be in "troubled condition" within the meaning of federal statutes and regulations. As a result, certain limitations and regulatory requirements apply to the Company and the Bank with respect to future changes to senior executive management and directors and the payment of, or the agreement to pay, certain severance payments to officers, directors and employees. The Bank must also comply with specified recordkeeping requirements in connection with transactions involving certain securities contracts, commodities contracts, repurchase agreements and other "Qualified Financial Contracts." Liquidity risk could impair our ability to fund operations and jeopardize our financial viability. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. The FHLB has reduced our line of credit from $202.21 million to $107.0 million, our current outstanding balance. The Federal Reserve Board has also notified the Bank that it will permit the Bank to draw on its line of credit with the Federal Reserve Bank only in limited circumstances and for a short duration. Factors that could further detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. As part of the September Order, we are not allowed to purchase brokered deposits without first obtaining a regulatory waiver. We are also required to comply with restrictions on deposit rates that we may offer. These factors could significantly affect our ability to fund normal operations. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the Table of Contents financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates. At January 31, 2010 the Bank's liquidity level exceeded the amounts required under the Bank's liquidity policy. We have $73.72 million in face amount of outstanding trust preferred securities issued by trust subsidiaries of our holding company. We have elected to defer the payment of interest on the subordinated debentures associated with the trust preferred securities and expect to continue to defer the payment of interest following the offering. If by January 2014 we are unable to resume the payment of interest on the subordinated debentures, we would be in default under the terms of some of the trust preferred securities, and the holders of the remaining trust preferred securities would be entitled to declare an event of default. In such event, the holders of trust preferred securities would be entitled to exercise their available remedies, including acceleration of all amounts due under the subordinated debentures, and it is likely that the holders of our common stock would lose most or all of their investment. At September 30, 2009, we had $73.72 million in face amount of outstanding trust preferred securities issued at various dates by seven trust subsidiaries of First Mariner. First Mariner issued subordinated deferrable interest debentures to each trust in exchange for the proceeds of the offering of the trust preferred securities. The trust preferred securities carried a weighted average interest rate of 4.54% during the nine months ended September 30, 2009. The terms of the various indentures governing the subordinated debentures provide that we may defer the payment of interest on the subordinated debentures for up to twenty consecutive quarters, and we elected to defer such payments beginning in January 2009. Pursuant to the terms of the September Order, we have agreed with the FDIC and the Commissioner that we will not use the proceeds of this offering to redeem outstanding trust preferred securities or repay deferred interest on the related subordinated debentures, so our trust preferred securities will remain outstanding following the stock offering. Though we have deferred the payment of interest on the subordinated debentures related to the trust preferred securities, we continue to accrue interest expense related to the trust preferred securities. First Mariner accrued interest expense of $4.64 million on the trust preferred securities during the year ended December 31, 2008 and $2.44 million during the nine months ended September 30, 2009. We will continue to accrue interest expense on trust preferred securities following the stock offering. Under the terms of the subordinated debentures, our deferral of interest payments for up to 20 consecutive quarters does not constitute an event of default. During the deferral period, the deferred interest payments continue to accrue. To the extent applicable law permits interest on interest, the deferred interest payments also accrue interest at the rates specified in the corresponding indentures, compounded quarterly. All of the deferred interest and the compound interest is due in full at the end of the applicable deferral period. If we fail to pay the deferred and compound interest at the end of the deferral period, each trustee of the various trusts, or in most cases the holders of 25% of the outstanding principal amount of any issue of trust preferred securities, would have the right, after any applicable grace period, to declare an event of default. The occurrence of an event of default on the subordinated debentures would entitle the trustees and holders of the trust preferred securities to exercise various remedies, including demanding immediate payment in full of the entire outstanding principal amount of the subordinated debentures. Currently we have no cash available at First Mariner to resume the payment of interest on the subordinated debentures, and the September Order prohibits our use of the proceeds from the stock offering for this purpose. Accordingly, our ability to resume the payment of interest on the subordinated debentures will depend on the Bank's ability to generate earnings and pay dividends to First Mariner. Currently, we are subject to the terms of the September Order, which prohibits the payment of dividends by the Bank without regulatory approval. As a result, if by January 2014 the Table of Contents September Order is not terminated, or if we do not achieve sufficient profitability for the Bank so that our regulators would grant approval for the Bank to pay dividends, we will be unable to resume the payment of interest on the subordinated debentures. Even if the Bank is able to resume paying dividends, we cannot be assured that the amount of dividends would be sufficient to pay the entire amount of interest due under the subordinated debentures at the end of the deferral period. For additional information regarding our outstanding trust preferred securities, see "Recent Developments Reduction of First Mariner's Long-Term Debt." We have had losses in recent periods. We incurred net losses of $18.5 million loss for the nine months ended September 30, 2009, including a one-time charge of $10.6 million relating to the sale of Mariner Finance. For the year ended December 31, 2008, we incurred a loss of $15.1 million. Our earnings in these periods have been hurt by adverse economic conditions, including falling home prices, increasing foreclosures and increasing unemployment, in our markets, and our losses for the nine months ended September 30, 2009 and for the year ended December 31, 2008 included $8.36 million and $14.78 million, respectively, of provisions for loan losses. Our ability to return to profitability will depend on whether we are able to reduce credit losses in the future, which will depend, in part, on whether economic conditions in our markets improve. Our management believes that our current business plan will be successful and believes we will be able to limit our losses; however, our business plan is subject to current market conditions and its successful implementation is uncertain. There is no assurance that we will be successful in executing our business plan or that even if we successfully implement our business plan, we will be able to curtail our losses now or in the future. If we continue to incur significant operating losses, our stock price may further decline. Even if we raise enough capital in this offering to allow us upon completion of the offering to meet the Bank and consolidated capital levels mandated by our regulators, if we incur further operating losses we may in the future need to raise additional capital to maintain Bank and consolidated capital levels that meet or exceed the levels mandated by our regulators. Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings. When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The recent decline in the national economy and the local economies of the areas in which the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, our determination as to the amount of our allowance for loan losses is subject to review by regulatory authorities, as part of their examination process, which may result in the establishment of an additional allowance after a review of the information available at the time of their examination. Our allowance Table of Contents for loan losses amounted to $11.1 million, or 1.23% of total loans outstanding and 22.3% of nonperforming loans ($29.7 million) and loans past-due 90 days or more and accruing ($20.2 million), as of September 30, 2009. Our allowance for loan losses at September 30, 2009 may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings. As of September 30, 2009, we had $869.97 million in outstanding loans that were performing according to their original terms. However, the deterioration of one or more of these performing loans could result in a significant increase in our nonperforming loans and our provision for loan losses, which would negatively impact our results of operations. We have a high percentage of commercial real estate and real estate construction loans in relation to our total loans. At September 30, 2009, we had $355.15 million in loans secured by commercial real estate and $150.94 million in real estate construction loans, which included $105.16 million in residential construction loans and $45.78 million for the construction of commercial properties. Commercial real estate loans and construction loans represented 39.48% and 16.78%, respectively, of our net loan portfolio. While commercial real estate and construction loans are generally more interest rate sensitive and carry higher yields than do residential mortgage loans, these types of loans generally expose a lender to greater risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property's value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans. Current regulatory guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. Based on our commercial real estate concentration as of September 30, 2009, we may be subject to further supervisory analysis during future examinations. Although we continuously evaluate our concentration and risk management strategies, we cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management cannot predict the extent to which this guidance will impact our operations or capital requirements. Mortgage banking activities generate a significant portion of our noninterest income. A significant portion of our business involves originating residential mortgage loans through our mortgage division, which accounted for approximately 57.5% and 47.0% of our noninterest income for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. Real estate loan origination activity, including refinancings, is generally greater during periods of low or declining interest rates and favorable economic conditions. Continued adverse changes in market conditions could have an adverse impact on our earnings through lower origination volumes. We face interest rate risk on our loans held for sale portfolio. We are exposed to interest rate risk in both our pipeline of mortgage originations (loans that have yet to close with the borrower) and in our warehouse loans (those loans that have closed with the borrower but have yet to be funded by investors). We have managed this interest rate risk through hedging strategies. We hedge a portion of our mortgage loan pipeline and warehouse utilizing forward sales of mortgage-backed securities for loans to be sold under mandatory delivery contracts. We expect that these derivative financial instruments (forward sales of mortgage-backed securities) will experience Table of Contents changes in fair value opposite to the change in fair value of the derivative loan commitments and our warehouse. However, the process of selling loans and use of forward sales of mortgage-backed securities to hedge interest rate risk associated with customer interest rate lock commitments involves greater risk than selling loans on an individual basis through best efforts forward delivery commitments. Hedging interest rate risk requires management to estimate the expected "fallout" (rate lock commitments with customers that do not complete the loan process). Additionally, the fair value of the hedge may not correlate precisely with the change in fair value of the rate lock commitments with the customer due to changes in market conditions, such as demand for loan products, or prices paid for differing types of loan products. Variances from management's estimates for customer fallout or market changes making the forward sale of mortgage-backed securities non-effective may result in higher volatility in our profits from selling mortgage loans originated for sale. We engage an experienced third party to assist us in managing our activities in hedging and marketing sales strategy. We face credit risk related to our residential mortgage production activities. We face credit risk related to our residential mortgage production activities. Credit risk is the potential for financial loss resulting from the failure of a borrower or an institution to honor its contractual obligations to us, including the risk that an investor will fail to honor its obligation under mandatory delivery contracts. We manage mortgage credit risk principally by selling substantially all of the mortgage loans that we produce, limiting credit recourse to the Bank in those transactions, and by retaining high credit quality mortgages in our loan portfolio. We also limit our risk of loss on mortgage loan sales by establishing limits on activity to any one investor and by entering into contractual relationships with only those financial institutions that are approved by our Secondary Marketing Committee. The period of time between closing on a loan commitment with the borrower and funding by the investor ranges from between 15 and 90 days. We face risk related to covenants in our loan sales agreements with investors. Our sales agreements with investors who buy our loans generally contain covenants which may require us to repurchase loans under certain provisions, including delinquencies, or return premiums paid by these investors should the loan be paid off early. Any loans we are required to repurchase may be considered impaired loans, with the potential for charge-offs and/or loss provision charges. The addition of these repurchased loans to our portfolio could adversely affect our earnings and asset quality ratios. There may be certain loans in our portfolio that were originated for sale, but for various reasons, are unable to be sold. These loans are transferred to our loan portfolio at fair market value. Any deterioration in value of the loan during the period held in the portfolio is charged to the allowance. Declines in asset values may result in impairment charges and adversely impact the value of our investments, financial performance and capital. We maintain an investment portfolio that includes, but is not limited to, mortgage-backed securities and pooled trust preferred collateralized debt obligations. The market value of investments may be affected by factors other than the underlying performance of the issuer, such as adverse changes in business climate and lack of liquidity for the resale of certain investment securities. As of September 30, 2009, we had $30.5 million, representing 73.0% of our securities portfolio, classified as available for sale pursuant to Financial Accounting Standards Board ("FASB") guidance. Unrealized gains and losses in the estimated value of the available-for-sale portfolio are "marked to market" and reflected as a separate item in stockholders' equity (net of tax) as accumulated other comprehensive income. The remaining investment securities are classified as trading and are stated at fair value with changes in value reflected in income. Table of Contents There can be no assurance that future market performance of our securities portfolio will enable us to realize income from sales of securities. Stockholders' equity will continue to reflect the unrealized gains and losses (net of tax) of these securities. There can be no assurance that the market value of our securities portfolio will not decline, causing a corresponding decline in stockholders' equity. The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB"). A member of the FHLB system is required to purchase stock issued by the relevant FHLB bank based on how much it borrows from the FHLB and the quality of the collateral pledged to secure that borrowing. Included in our investment portfolio as of September 30, 2009 is approximately $7.9 million in capital stock of the FHLB. The FHLB is experiencing a potential capital shortfall, has suspended its quarterly cash dividend, and could possibly require its members, including First Mariner, to make additional capital investments in the FHLB. There can be no guaranty that the FHLB will declare future dividends. In order to avail itself of correspondent banking services offered by the FHLB, we must remain a member of the FHLB. If the FHLB were to cease operations, or if we were required to write-off its investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially and adversely affected. We periodically, but not less than quarterly, evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other than temporary impairment, which could have a material adverse effect on results of operations in the period in which the write-off occurs. Accounting guidance indicates that an investor in FHLB stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares. The decision of whether impairment exists is a matter of judgment that should reflect the investor's an FHLB's long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on the FHLB, and accordingly, on the members of the FHLB and its liquidity and funding position. After evaluating all of these considerations, we believe the par value of our FHLB stock will be recovered, but future evaluations of the above mentioned factors could result in the Bank recognizing an impairment charge. Management believes that several factors will affect the market values of our securities portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value. These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category. Negative conditions in the general economy and financial services industry may limit our access to additional funding and adversely impact liquidity. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect it specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of its business activity due to a market down turn or adverse regulatory action against it. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption Table of Contents of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. Increased and/or special FDIC assessments will negatively impact our earnings. Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. The base assessment rate was increased by seven basis points (7 cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounted to 5 basis points on each institution's assets minus tier one (core) capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the institution's assessment base. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was approximately $600,000. The FDIC may impose additional emergency special assessments if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will negatively impact our earnings. On November 12, 2009, the FDIC adopted a final rule requiring that all institutions prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment was due on December 30, 2009. However, the FDIC may exempt certain institutions from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. We have been granted an exemption to this prepayment requirement. Our ability to pay cash dividends is limited. Holders of shares of our common stock are entitled to dividends if declared by our board of directors out of funds legally available for that purpose. In general, future dividend policy is subject to the discretion of the board of directors and will depend including the future earnings, capital requirements, regulatory constraints, and our financial condition, as well as that of the Bank and Mariner Finance. As described above, we have entered into an agreement to sell our interest in Mariner Finance, which sale is expected to close in December 2009. Although the board of directors has declared cash dividends in the past, it has discontinued such payments to conserve cash and capital resources, and does not intend to declare cash dividends until current earnings are sufficient to generate adequate internal capital to support growth. Our current ability to pay dividends is largely dependent upon the receipt of dividends from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. Federal law prohibits the payment of a dividend by an insured depository institution if the depository institution is considered "undercapitalized" or if the payment of the dividend would make the institution "undercapitalized." For a Maryland commercial bank, dividends may be paid out of undivided profits or, with the prior approval of the Maryland Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, then cash dividends may not be paid in excess of 90% of net earnings. Our ability to pay dividends is further subject to its ability to make payments of interest under junior subordinated debentures due through 2035 held by our statutory trusts Mariner Capital Trust II, III, IV, V, VI, VII, and VIII (collectively, the "Trusts"). These payments are necessary to fund the Table of Contents distributions that the Trusts each must pay to holders of its trust preferred securities (collectively, the "Trust Preferred Securities"). The terms of debentures permit us to defer interest payments for up to 20 quarterly periods. Such a deferral is not an event of default, but the interest continues to accrue and we are prohibited from paying any dividends on our common stock for so long as interest is deferred. We are also prohibited from paying any dividends on our common stock if we are in default under the debentures. On December 22, 2008, we announced our election to defer interest payments on the debentures relating to the Trust Preferred Securities beginning with the January 7, 2009 payment, and January 8, 2009 with respect to these issued by Mariner Capital Trust V. This deferment does not constitute an event of default on the securities; however, the cumulative interest on these securities must be paid prior to the declaration of any stock dividends. Finally, First Mariner and the Bank have entered into regulatory agreements with our regulators which, among other things, require us to seek prior regulatory approval before the Bank pays dividends to First Mariner and/or before First Mariner pays dividends on its common stock. Our funding sources may prove insufficient to replace deposits and support our future growth. We rely on customer deposits, advances from the FHLB, and lines of credit at other financial institutions to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, no assurance can be given that we would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained and/or our cost of funds will increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected. We currently hold a significant amount of bank owned life insurance. We currently hold a significant amount of bank owned life insurance ("BOLI") on key employees and executives that have cash surrender values of $34.4 million as of September 30, 2009. The eventual repayment of the cash surrender value is subject to the ability of various insurance companies to pay benefits in the event of the death of an insured employee, or return the cash surrender value to us in the event of our need for liquidity. We continuously monitor the financial strength of the various insurance companies with whom we carry policies. However, there is no assurance that one or more of these companies will not experience a decline in financial strength, which could impair its ability to pay benefits or return our cash surrender value. Additionally, should we need to liquidate these policies for liquidity needs, we would be subject to taxation on the increase in cash surrender value as well as penalties for early termination of the insurance contracts. These events would have a negative impact on our earnings. Fluctuating interest rates can adversely affect our profitability. Our profitability is dependent to a large extent upon net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a rapidly changing interest rate environment, we may not be able to manage this risk effectively. Changes in interest rates also can affect: (1) our ability to originate and/or sell loans; (2) the value of our interest-earning assets, which would negatively impact shareholders' equity, and our ability to realize gains from the sale of Table of Contents such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed. We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, including changes that may restrict our ability to foreclose on single-family home loans and offer overdraft protection. We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or laws could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. New legislation proposed by Congress may give bankruptcy courts the power to reduce the increasing number of home foreclosures by giving bankruptcy judges the authority to restructure mortgages and reduce a borrower's payments. Property owners would be allowed to keep their property while working out their debts. Other similar bills placing additional temporary moratoriums on foreclosure sales or otherwise modifying foreclosure procedures to the benefit of borrowers and the detriment of lenders may be enacted by either Congress or the State of Maryland in the future. These laws may further restrict our collection efforts on one-to-four single-family mortgage loans. Additional legislation proposed or under consideration in Congress would give current debit and credit card holders the chance to opt out of an overdraft protection program and limit overdraft fees, which could result in additional operational costs and a reduction in our non-interest income. Further, our regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by financial institutions and holding companies in the performance of their supervisory and enforcement duties. In this regard, banking regulators are considering additional regulations governing compensation, which may adversely affect our ability to attract and retain employees. On June 17, 2009, the Obama Administration published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system. The President's plan contains several elements that would have a direct effect on First Mariner and First Mariner Bank. The reform plan proposes the creation of a new federal agency, the Consumer Financial Protection Agency, that would be dedicated to protecting consumers in the financial products and services market. The creation of this agency could result in new regulatory requirements and raise the cost of regulatory compliance. In addition, legislation stemming from the reform plan could require changes in regulatory capital requirements, and compensation practices. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, because the legislation needed to implement the President's reform plan has not been introduced, and because the final legislation may differ significantly from the legislation proposed by the Administration, we cannot determine the specific impact of regulatory reform at this time. We face significant operational risks. We operate in many different businesses in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside of First Mariner and First Mariner Bank, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, and catastrophic failures resulting from terrorist acts or natural disasters, breaches of the internal control system, and compliance Table of Contents requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that results in a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation. Additionally, the financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Operations in several of our markets could be disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to our banking and operation facilities. Although we have not experienced such an occurrence to date, severe weather or natural disasters, acts of war or terrorism, or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Our management controls a significant percentage of our common stock. At September 30, 2009, our directors and executive officers beneficially owned approximately 1,985,758 shares of our common stock (amount includes shares that could be acquired pursuant to immediately exercisable stock options), or 30.8% of our outstanding shares of common stock plus exercisable options. Edwin F. Hale, Sr., who is our Chairman, Chief Executive Officer, and largest stockholder, beneficially owns 1,461,366 shares of common stock (with options), or 22.6% of our outstanding shares of common stock plus exercisable options as of September 30, 2009. These amounts do not include shares that may be issued in the Exchange if the Exchange is approved by shareholders at the special meeting shareholders to be held on March 19, 2010. For more information on the Exchange, see "Summary Recent Developments Reduction of First Mariner Long-Term Debt" and "Capitalization Pro Forma Adjustments for Exchange of Common Stock and Warrants for Trust Preferred Securities," below, as well as the Company's Form 8-K filed with the SEC on February 9, 2010 and its Definitive Proxy Statement, filed with the SEC on February 16, 2010, both of which are incorporated herein by reference. Because of the large percentage of stock held by our directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our shareholders. Table of Contents Contracts with our officers may discourage a takeover or adversely affect our takeover value. We have entered into change in control agreements with nine of our officers. These agreements provide for a payment to each officer of a multiple (ranging from 1 to 2.99) of his or her salary and bonus upon the occurrence of either a change in control that results in the loss of employment or a significant change in his or her employment. Thus, we may be required to make significant payments in the event that the rights under these agreements are triggered by a change in control. As a result, these contracts may discourage a takeover, or adversely affect the consideration payable to stockholders in the event of a takeover. Notwithstanding the foregoing, because the Company and the bank are considered to be in "troubled condition" for regulatory purposes, payments made under any change of control agreement are subject to certain regulatory restrictions and limitations. The Company and the Bank must apply for and receive the approval of the FRB and the FDIC, respectively, in order to make payments under these agreements. See " The Company and the Bank are deemed to be in "troubled condition." Our Articles and Bylaws and Maryland law may discourage a corporate takeover. Our Articles and Amended and Restated Bylaws ("Bylaws") contain certain provisions designed to enhance the ability of the board of directors to deal with attempts to acquire control of First Mariner. These provisions provide for the classification of our board of directors into three classes; directors of each class serve for staggered three year periods. The Articles also provide for supermajority voting provisions for the approval of certain business combinations. Maryland law also contains anti-takeover provisions that apply to us. The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any "business combination" (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any "interested shareholder" for a period of five years following the most recent date on which the interested shareholder became an interested shareholder. An interested shareholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% percent or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of "control shares," which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights. Although these provisions do not preclude a takeover, they may have the effect of discouraging a future takeover attempt which would not be approved by our board of directors, but pursuant to which stockholders might receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction might not have the opportunity to do so. Such provisions will also render the removal of our board of directors and of management more difficult and, therefore, may serve to perpetuate current management. Further, such provisions could potentially adversely affect the market price of our common stock. Table of Contents A continuation of recent turmoil in the financial markets could have an adverse effect on our financial position or results of operations. Beginning in 2008, United States and global financial markets have experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic, industry and regulatory environment, have had a marked negative impact on the industry. Dramatic declines in the U.S. housing market over the past two years, with falling home prices, increasing foreclosures and increasing unemployment, have negatively affected the credit performance of mortgage loans and resulted in significant write-downs of asset values by many financial institutions. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have also been working to design and implement programs to improve general economic conditions. Notwithstanding the actions of the United States and other governments, these efforts may not succeed in restoring industry, economic or market conditions and may result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including First Mariner, are numerous and include (i) worsening credit quality, leading among other things to increases in loan losses and reserves, (ii) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in asset values, (iii) capital and liquidity concerns regarding financial institutions generally, (iv) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system, or (v) recessionary conditions that are deeper or last longer than currently anticipated. Our financial condition and results of operations are dependant on the economy in the Bank's market area. First Mariner Bank's primary market area for its core banking operations consists of central Maryland and portions of Maryland's eastern shore. Because of the Bank's concentration of business activities in its market area, our financial condition and results of operations depend upon economic conditions in the Bank's market area. Adverse economic conditions in our market area could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of Maryland could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur. We currently have a significant amount of deferred tax assets. We had $28.5 million of deferred tax assets as of September 30, 2009. The analysis of the realization of deferred tax assets requires making various forecasts and assumptions, including future flows of taxable income. Actual results may differ from forecasts and assumptions, which could cause a write down of our deferred tax assets and have a negative impact on our financial condition and results of operations. Table of Contents If we are unable to satisfy the continued listing standards of NASDAQ, our stock may be delisted from the NASDAQ Stock Market, which could adversely affect its market price and liquidity. We are required to meet NASDAQ's continued listing requirements in order to remain listed on The NASDAQ Stock Market. We are listed on The NASDAQ Global Market. On December 10, 2009, the Company received a letter from The NASDAQ Stock Market providing notice that, for 30 consecutive business days, the Company's common stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $5 million as required for continued inclusion on The NASDAQ Global Market by Listing Rule 5450(b)(1)(c). For NASDAQ purposes, MVPHS is the market value of the Company's publicly held shares, which is calculated by subtracting all shares held by officers, directors or beneficial owners of 10% or more of the total shares outstanding. NASDAQ provided the Company until March 10, 2009 to regain compliance with Listing Rule 5450(b)(1)(c). Also on December 10, 2009, the Company received a letter from The NASDAQ Stock Market providing notice that, for 30 consecutive business days, the Company's common stock had not maintained a minimum bid price of $1.00 per share as required for continued inclusion on The NASDAQ Global Market by Listing Rule 5450(a)(1). NASDAQ provided the until June 8, 2010 to regain compliance with Listing Rule 5450(a)(1). On February 3, 2010, the NASDAQ provided us with a letter that our common stock had regained compliance with these Listing Rules and both matters were now closed. In the future, if our common stock were unable to satisfy The NASDAQ Stock Market's listing standards and we were not able to regain compliance with the listing standards, our stock could be delisted from The NASDAQ Stock Market. If our common stock is delisted, it could be more difficult to buy or sell our common stock and to obtain accurate quotations, and the price of our stock could suffer a material decline. Delisting may also impair our ability to raise capital. Furthermore, if our common stock is delisted, we would apply to have our common stock quoted on the OTC Bulletin Board, and our common stock would become subject to the SEC's penny stock regulations. A penny stock, as defined by the Penny Stock Reform Act, is any equity security not traded on a national securities exchange that has a market price of less than $5.00 per share. The penny stock regulations generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. The broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures, including the actual sale or purchase price and actual bid offer quotations, as well as the compensation to be received by the broker-dealer and certain associated persons. The regulations applicable to penny stocks may severely affect the market liquidity for our common stock and could limit your ability to sell your securities in the secondary market. Risks Related to the Rights Offering The future price of the shares of common stock may be less than the $1.15 purchase price per share in the rights offering. If you exercise your subscription rights to purchase shares of common stock in the rights offering, you may not be able to sell them later at or above the $1.15 purchase price in the rights offering. The actual market price of our common stock could be subject to wide fluctuations in response to numerous factors, some of which are beyond our control. These factors include, among other things, actual or anticipated variations in our costs of doing business, operating results and cash flow, the nature and content of our earnings releases and our competitors' earnings releases, changes in financial estimates by securities analysts, business conditions in our markets and the general state of the securities markets and the market for other financial stocks, changes in capital markets that affect the perceived availability of capital to companies in our industry, governmental legislation or regulation, Table of Contents currency and exchange rate fluctuations, as well as general economic and market conditions, such as downturns in our economy and recessions. Once you exercise your subscription rights, you may not revoke them. If you exercise your subscription rights and, afterwards, the public trading market price of our shares of common stock decreases below the subscription price, you will have committed to buying shares of our common stock at a price above the prevailing market price and could have an immediate unrealized loss. Our common stock is traded on the NASDAQ Global Market under the ticker symbol "FMAR," and the last reported sales price of our common stock on the NASDAQ Global Market on February 12, 2010 was $1.41 per share. We cannot assure you that the market price of our shares of common stock will not decline after you exercise your subscription rights. Moreover, we cannot assure you that following the exercise of your subscription rights you will be able to sell your common stock at a price equal to or greater than the subscription price. The subscription price determined for the rights offering is not an indication of the fair value of our common stock. In determining the subscription price, the board of directors considered a number of factors, including: the price at which our shareholders might be willing to participate in the rights offering, historical and current trading prices for our common stock, an analysis of comparable transactions provided by our financial advisor, the need for liquidity and capital and the desire to provide an opportunity to our shareholders to participate in the rights offering on a pro rata basis. In conjunction with its review of these factors, the board of directors also reviewed our history and prospects, including our past and present earnings, our prospects for future earnings, our current financial condition and regulatory status. The per share subscription price is not necessarily related to our book value, net worth or any other established criteria of fair value and may or may not be considered the fair value of our common stock to be offered in the rights offering. After the date of this prospectus, our shares of common stock may trade at prices below the subscription price. Stockholders may face significant dilution as a result of the stock offering. Other than stockholders who purchase sufficient shares of our common stock in the rights offering, including the exercise of over-subscription rights to the extent sufficient shares are available to maintain their proportionate ownership interest, the issuance of shares of our common stock in the stock offering would dilute, and thereby reduce, each existing stockholder's proportionate ownership interest in our shares of common stock. The dilutive effect of the stock offering may have an adverse impact on the market price of the Company's common stock. Although we reserve the right to negotiate and enter into standby purchase agreements with standby purchasers following the effectiveness of this prospectus, we may not enter into any such agreements, which could impact our ability to raise adequate capital to fund our operations and satisfy our regulatory capital goals. We intend to negotiate and enter into standby purchase agreements with standby purchasers following the effectiveness of this prospectus; however, we cannot guarantee that we will successfully negotiate and enter into such agreements. In the event we do not enter into standby purchase agreements, our capital raising efforts could be negatively impacted and as a result, we may not be able to improve our regulatory capital position. We do not currently have written commitments from any third parties to act as standby purchasers or any other guarantees that shareholders and potential investors will purchase any of the shares of common stock offered in this rights offering or otherwise. Accordingly, we may not be able to raise sufficient additional capital to continue to fund our operations. Table of Contents We could, as a result of the stock offering or future trading activity in our common stock, experience an "ownership change" for tax purposes that could cause us to permanently lose a portion of its U.S. federal deferred tax assets. The completion of the stock offering could cause us to experience an "ownership change" as defined for U.S. federal income tax purposes. Even if these transactions do not cause us to experience an "ownership change," these transactions materially increase the risk that we could experience an "ownership change" in the future. As a result, issuances or sales of common stock or other securities in the future (including common stock issued in the stock offering), or certain other direct or indirect changes in ownership, could result in an "ownership change" under Section 382 of the Internal Revenue Code of 1986, as amended. In the event an "ownership change" were to occur, we could realize a permanent loss or a portion of its U.S. federal deferred tax assets as a result of limitations on certain built-in losses that have not been recognized for tax purposes, including, for example, losses on existing nonperforming assets. The amount of the permanent loss would depend on the size of the annual limitation (which is in part a function of our market capitalization at the time of an ownership change) and the applicable carry-forward period (U.S. federal net operating losses generally may be carried forward for a period of 20 years). Any permanent loss could have a material adverse effect on our results of operations and financial condition. We have not established a valuation allowance against our U.S. federal deferred tax assets of September 30, 2009, as we believed, based on our analysis as of that date, that it was more likely than not that all of these assets would be realized. Section 382 of the Internal Revenue Code imposes restrictions on the use of a corporation's net operating losses, certain recognized built-in losses and other carryovers after an "ownership change" occurs. An "ownership change" is generally a greater than 50 percentage point increase by certain "5% shareholders" during the testing period, which is generally the three year-period ending on the transaction date. Upon an "ownership change," a corporation generally is subject to an annual limitation on its pre-change losses and certain recognized built-in losses equal to the value of the corporation's market capitalization immediately before the "ownership change" multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain recognized built-in losses that may be utilized. Pre-change losses and certain recognized built-in losses in excess of the cap are effectively lost. The relevant calculations under Section 382 of the Internal Revenue Code are technical and highly complex. The stock offering, combined with other ownership changes in recent years, could cause First Mariner to experience an "ownership change." If an "ownership change" were to occur, we believe it could permanently lose the ability to realize a portion of its deferred tax asset, resulting in reduction to our total shareholders' equity. This could also decrease the Bank's regulatory capital. We do not believe, however, that any such decrease in regulatory capital would be material because, among other things, only a small portion of the federal deferred tax asset is currently included in the Bank's regulatory capital. You may not revoke your exercise of rights; we may terminate the rights offering. Once you have exercised your subscription rights, you may not revoke your exercise even if you learn information about us that you consider to be unfavorable. We may terminate the rights offering at our discretion, including without limitation if we fail to sell at least 8,695,653 shares and raise at least $10.0 million in the stock offering. If we terminate the rights offering, neither we nor the subscription agent will have any obligation to you with respect to the rights except to return any payment received by the subscription agent, without interest or penalty. Table of Contents You will not be able to sell the shares you buy in the rights offering until you receive your stock certificates or your account is credited with the shares of common stock. If you purchase shares of our common stock in the rights offering by submitting a rights certificate and payment, we will mail you a stock certificate as soon as practicable after [EXPIRATION DATE], or such later date as to which the rights offering may be extended. If your shares are held by a custodian bank, broker, dealer or other nominee and you purchase shares of our common stock, your account with your nominee will be credited with the shares of common stock you purchased in the rights offering as soon as practicable after the expiration of the rights offering, or such later date as to which the rights offering may be extended. Until your stock certificates have been delivered or your account is credited, you may not be able to sell your shares even though the common stock issued in the rights offering will be listed for trading on the NASDAQ Global Market. The stock price may decline between the time you decide to sell your shares and the time you are actually able to sell your shares. Although publicly traded, our common stock has substantially less liquidity than the average liquidity of stocks listed on the NASDAQ Global Market. Although our common stock is listed for trading on the NASDAQ Global Market our common stock has substantially less liquidity than the average liquidity for companies listed on the NASDAQ Global Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This marketplace depends on the individual decisions of investors and general economic and market conditions over which we have no control. This limited market may affect your ability to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price of our common stock. For these reasons, our common stock should not be viewed as a short-term investment. The market price of our common stock may fluctuate in the future, and this volatility may be unrelated to our performance. General market price declines or overall market swings in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. We have broad discretion in the use of proceeds of the stock offering. Other than an investment in the Bank, we have not designated the anticipated net proceeds of the stock offering for specific uses. Accordingly, our management will have considerable discretion in the application of the net proceeds of the stock offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. See "Use of Proceeds." Table of Contents

parsed_sections/risk_factors/2010/CIK0000947577_nuco2-inc_risk_factors.txt ADDED Viewed

The diff for this file is too large to render. See raw diff

parsed_sections/risk_factors/2010/CIK0001005010_arthrocare_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS Investing in our Common Stock involves a high degree of risk. You should consider carefully the following risks and uncertainties described below and the other information contained in this prospectus, including our consolidated financial statements and the related notes, before you decide whether to purchase our Common Stock. If any of these risks, or any other risk not currently known to us or that we currently deem immaterial, should actually occur, our business, financial condition, and results of operations could be materially adversely affected. As a result, the market price of our Common Stock could decline, and you may lose part or all of your investment. Risks to the Business Material weaknesses and other control deficiencies relating to our internal control over financial reporting could result in errors in our reported results and could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Management's assessment of our internal control over financial reporting as of December 31, 2009 concluded that our internal control over financial reporting was not effective and that material weaknesses existed. Until these material weaknesses and other control deficiencies are remediated, they could lead to errors in our reported financial results and could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities. As described in "Part I Item 4 Controls and Procedures" of our June 30, 2010 Form 10-Q we are currently in the process of remediating our identified material weaknesses. Management's continuing evaluation and work to enhance our internal control over financial reporting will require the dedication of additional resources and management time and expense. If we fail to establish and maintain adequate internal control over financial reporting, including any failure to implement remediation measures and enhancements for internal controls, or if we experience difficulties in their implementation, our business, financial condition and operating results could be harmed. Any material weakness or unsuccessful remediation could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected, which in turn could materially and adversely affect our business, our strategic alternatives, our financial condition and the market value of our securities. In addition, perceptions of us among customers, lenders, investors, securities analysts and others could also be adversely affected. Current material weaknesses or any weaknesses or deficiencies identified in the future could also hurt confidence in our business and the accuracy and completeness of our financial statements, and adversely affect our ability to do business with these groups. We can give no assurances that the measures we have taken to date, or any future measures we may take, will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit(1) Proposed Maximum Aggregate Offering Price Amount of Registration Fee(2) Common Stock, underlying Series A 3.00% Convertible Preferred Stock, par value $0.001 per share 5,805,921 $26.76 $155,366,446 $11,078(3) (1)The price is estimated in accordance with Rule 457(c) under the Securities Act, solely for the purpose of calculating the registration fee and is $26.76, the average of the high and low prices of ArthroCare Corporation's common stock as reported by NASDAQ on July 30, 2010. (2)Determined pursuant to Rule 457(a). (3)A registration fee of $11,781 was previously paid. Table of Contents those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the SEC. A failure to remain current in our filings may have material impacts on our business and liquidity. If we are not able to remain current in our filings with the SEC, we will face several adverse consequences and restrictions. We will not be able to have a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering a public offering of securities, declared effective by the SEC, or make offerings pursuant to existing registration statements; we will not be able to make an offering to any purchasers not qualifying as "accredited investors" under certain "private placement" rules of the SEC under Regulation D; we will not be eligible to use a "short form" registration statement on Form S-3 for a period of at least 12 months after the time we become current in our periodic and current reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); we will not be able to deliver the requisite annual report and proxy statement to our stockholders to hold our annual stockholders meeting; our employees cannot be granted stock options, nor will they be able to exercise stock options registered on Form S-8, because Form S-8 would not be available to us; and our Common Stock may be delisted from the NASDAQ Stock Market. These restrictions may impair our ability to raise funds in the public markets, should we desire to do so, and to attract and retain employees. The Review and resulting restatement, SEC and DOJ investigations and other investigations, legal and administrative proceedings have increased our costs and could result in fines, injunctions, orders, and penalties which could materially adversely affect our business, financial condition, results of operations, and liquidity. As previously reported, during 2009 and 2008, we experienced substantial delays in filing our periodic reports as a result of issues identified during the Review. The Review was completed in August 2009 and the results were reported to the Audit Committee and to the Board. In July 2008, we also commenced a separate comprehensive review of our accounting policies and procedures, financial reporting, internal controls and corporate governance. We completed this comprehensive review in November 2009, and as a result of our comprehensive review and the Review, we made extensive organizational and operational changes and improved our internal controls. As a result of errors and possible irregularities identified by the Review and management's review and analysis of certain accounting matters, we restated our financial statements for: the years ended December 31, 2007, 2006, 2005, and 2004; the quarter ended March 31, 2008 and each of the quarters for the years ended December 31, 2007 and 2006 in our Form 10-K for the year ended December 31, 2008 filed on November 18, 2009, or the 2008 Form 10-K. We are involved in ongoing material legal proceedings and the actions currently pending result primarily from matters relating to our restatement and Review.. See Note 7, "Litigation and Contingencies," in the notes to the condensed consolidated financial statements in our June 30, 2010 Form 10-Q. These proceedings and other legal actions may harm our business or liquidity in the future. We have incurred substantial cost and expenses for legal and accounting services due to the Review and resulting SEC and DOJ investigations. These matters will likely continue to divert our management's time and attention and cause us to continue to incur substantial costs and expenses. Such investigations can also lead to fines or injunctions or orders with respect to future activities. We could incur substantial additional costs to defend and resolve litigation, investigations or proceedings arising out of or related to these matters. In addition, we could be exposed to enforcement or other actions with respect to these matters by the SEC's Division of Enforcement, the DOJ or other federal or state agencies. At this point, we are unable to predict the duration, scope or result of these investigations or whether any of these agencies will commence any legal action. Any such investigations Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in states where the offer or sale is not permitted. Subject to Completion. Dated August 4, 2010. 5,805,921 Shares Common Stock par value $0.001 per share Table of Contents may result in us being subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity. In connection with our pending legal proceedings, including any further litigation that is pursued or other relief sought by persons asserting claims for damages allegedly resulting from or based on the restatement or related events, we will incur defense costs that may exceed our insurance coverage. We may also incur costs if the insurers of our directors and our liability insurers deny coverage for the costs and expenses related to any litigation. Many of our pending legal proceedings are in the early stages and we cannot predict their outcomes. However, irrespective of the outcomes, we may incur substantial costs, including defense and indemnity costs, and these matters may divert the attention of our technical and management personnel, which could materially harm our business. Moreover, if we do not prevail in any such actions, we could be required to pay substantial damages or settlement costs. Adverse outcomes or other developments during the course of litigation or other proceedings may harm our business, financial condition, results of operations or liquidity as well as investors' perception of our business, any of which could harm our stock price. Our failure to comply with extensive government regulations could subject us to penalties and materially adversely affect our business, results of operations and financial condition. Our medical device products and operations are subject to extensive regulation by the Food and Drug Administration, or FDA, and various other federal, state and foreign governmental authorities. Government regulations and foreign requirements specific to medical devices are wide ranging and govern, among other things: design, development and manufacturing; testing, labeling and storage; clinical trials; product safety; marketing, sales and distribution; pre-market clearance and approval; record keeping procedures; advertising and promotions; recalls and field corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; and product import and export. The FDA and other governmental authorities have broad enforcement powers, and our failure to comply with these regulatory requirements could result in governmental agencies or a court taking action, including any of the following, which would adversely affect our business: issuing public warning letters to us; imposing fines and penalties on us; obtaining an injunction preventing us from manufacturing or selling our products; bringing civil or criminal charges against us; delaying the introduction of our products into the market; delaying pending requests for clearance or approval of new uses or modifications to our existing products; recalling, detaining or seizing our products; or withdrawing or denying approvals or clearances for our products. If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer civil and criminal penalties, be required to pay substantial damages and make significant changes to our products and operations. During the past several years, the U.S. health care industry has been subject to an increase in governmental regulation at both the federal and state levels. We are subject to numerous federal and state regulations. As part of our internal compliance program, we review our sales and marketing materials, contracts and programs with counsel, and require employees and marketing representatives to participate in regular training. We also have adopted and train our personnel on the code of conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. Most recently, we amended our Code of Business Conduct and Ethics, the "Code of Ethics," in August 2009. Originally adopted in 2004 to qualify as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002, the Code of Ethics was amended to qualify as well as a "code of conduct" This prospectus relates to the offer and sale from time to time by certain of the selling stockholders identified in this prospectus, and any of their pledges, donees, transferees or other successors in interest, of up to an aggregate of 5,805,921 shares of ArthroCare Corporation ("ArthroCare" or the "Company") Common Stock, par value $0.001 per share (the "Common Stock") underlying the Company's Series A 3.00% Convertible Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"). The underlying shares of Common Stock are issuable upon conversion of the Series A Preferred Stock. We are registering the offer and sale of the Common Stock covered by this prospectus to satisfy registration rights we have granted to the selling stockholders identified in this prospectus. We will not receive any of the proceeds from the sale of the shares by the selling stockholders, but we have agreed to pay certain registration expenses relating to such shares of our Common Stock. The selling stockholders from time to time may offer and sell the shares held by them directly or through agents or broker-dealers on terms to be determined at the time of sale, as described in more detail in this prospectus and any accompanying prospectus supplements. The prices at which the selling stockholders may sell the shares may be determined by the prevailing market price for the shares at the time of sale, may be different than such prevailing market prices or may be determined through negotiated transactions with third parties. Our Common Stock is traded on the NASDAQ Global Market ("NASDAQ") under the symbol "ARTC". On August 3, 2010, the last reported sale price of our Common Stock was $27.14 per share. See "Risk Factors" beginning on page 7 to read about factors you should consider before buying shares of the Common Stock. Table of Contents under the current Federal Sentencing Guidelines and "Compliance Program Guidance for Pharmaceutical Manufacturers" 68 FR 23731 (May 5, 2003) applicable to medical device companies as published by the Office of Inspector General for the Department of Human Services. The Code of Ethics applies to all of our directors, officers, employees and agents. It also serves as an essential element of our Corporate Compliance Program, as announced in August 2009. However, we can give no assurances that our compliance program will ensure that the Company is in compliance with existing or future applicable laws and regulations. If our compliance program fails to meet its objectives, or if we otherwise fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties. We devote significant operational and managerial resources to comply with these laws and regulations. Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make significant changes to our products and operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain the regulatory approvals required to operate our business. Our accounting policies and methods require management to make judgments and estimates about matters that are inherently uncertain, which may result in our actual results differing significantly from those generated by our judgments and estimates. Our accounting policies and methods require management to exercise judgment in applying many of these accounting policies and methods so that these policies and methods comply with generally accepted accounting principles in the U.S., or GAAP, and reflect management's judgment of the most appropriate manner to report our financial condition and results of operations. See Note 3, "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements in our 2009 Form 10-K for a description of our significant accounting policies. The accounting policies we have identified as critical to the presentation of our financial condition and results of operations are described in "Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates" in our 2009 Form 10-K. We believe these policies are critical because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain at the end of a period and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Due to the complexity of these critical accounting policies, our accounting methods relating to these policies involve substantial use of estimates. Estimates are inherently imperfect predictors of actual results because they are based on assumptions, including assumptions about future events. Our estimates may not include assumptions that reflect very positive or very negative market conditions and, accordingly, our actual results could differ significantly from those generated by our estimates. As a result, the estimates that we use to prepare our financial statements, as well as our estimates of our future results of operations, may be significantly inaccurate. We may be the subject of federal and state government civil and criminal enforcement efforts against health care companies, which could result in civil and/or criminal penalties which could have a material negative impact on our operations and financial condition. In addition to uncertainties surrounding coverage policies, both federal and state government agencies have heightened civil and criminal enforcement efforts against health care companies, as well as their executives and managers. These efforts generally relate to a wide variety of matters, including referral and billing practices, and implicate a variety of state and federal laws, including state insurance fraud provisions, common law fraud theories, as well as both state and federal fraud-and-abuse, anti-kickback, and false claims statutes. Although we no longer directly bill any payor, some of our prior activities could become the subject of additional governmental investigations or inquiries. If we do not comply with the laws and regulations relevant to our business, we could be subject to civil and/or Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Table of Contents criminal penalties which could have a material negative impact on our operations and financial condition. We are, and may in the future be, subject to intellectual property claims, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. We cannot assure you that we will not become subject to additional patent infringement claims or other litigation, including interference proceedings declared by the U.S. Patent and Trademark Office, or USPTO, to determine the priority of inventions. The defense and prosecution of intellectual property lawsuits generally, USPTO reexamination and interference proceedings and related legal and administrative proceedings, are costly and time-consuming. If other parties violate our proprietary rights, further litigation may be necessary to enforce our patents, to protect trade secrets or know-how we own or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or reexamination or interference proceedings will be costly and cause significant diversion of effort by our technical and management personnel. An adverse determination in existing litigation, additional litigation or reexamination or interference proceedings to which we may become a party could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using certain technology. Furthermore, we cannot assure you that we could obtain necessary licenses on satisfactory terms, if at all. Adverse determinations in judicial or administrative proceedings or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business, financial condition, results of operations, and future growth prospects. Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, business, financial condition, results of operations and future growth prospects. Our ability to compete effectively depends in part on developing and maintaining the proprietary aspects of our Coblation technology and our acquired technologies. We believe that our issued patents are directed at the core technology used in our soft-tissue surgery systems, including both multi-electrode and single electrode configurations of our disposable devices, as well as the use of Coblation technology in specific surgical procedures. In addition, we believe that our issued patents are directed at many of the core features of our acquired technologies from Opus, Parallax, Atlantech and ATI. Our earliest Coblation patents begin to expire in 2012. The majority of our royalty income is associated with licenses that include core Coblation patent rights which extend through the end of 2014. There is no assurance that the patents we have obtained, or any patents we may obtain as a result of our pending U.S. or international patent applications, will provide any competitive advantages for our products. We also cannot assure investors that those patents will not be successfully challenged, invalidated or circumvented prior to their expiration. In addition, we cannot provide assurance that competitors, many of which have substantial resources and have made substantial investments in competing technologies, have not already applied for or obtained, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our products either in the U.S. or in international markets. In Sports Medicine, many of our competitors have licensed our technology for limited fields of use. Patent applications are maintained in secrecy for a period after filing. We may not be aware of all of the patents and patent applications potentially adverse to our interests. Prospectus dated , 2010. Table of Contents A number of medical device and other companies, universities and research institutions have filed patent applications or have issued patents relating to monopolar and/or bipolar electrosurgical methods and apparatus. We have received, and we may receive in the future, notifications of potential conflicts of existing patents, pending patent applications and challenges to the validity of existing patents. In addition, we have become aware of, and may become aware of in the future, patent applications and issued patents that relate to our products and/or the surgical applications and issued patents and, in some cases, have obtained internal and/or external opinions of counsel regarding the relevance of certain issued patents to our products. We do not believe that our products currently infringe any valid and enforceable claims of the issued patents that we have reviewed. However, if third-party patents or patent applications contain claims infringed by our technology and such claims are ultimately determined to be valid, we may not be able to obtain licenses to those patents at a reasonable cost, if at all, or be able to develop or obtain alternative technology. Our inability to do either would have a material adverse effect on our business, financial condition, results of operations and future growth prospects. We cannot assure investors that we will not have to defend ourselves in court against allegations of infringement of third-party patents, or that such defense would be successful. In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements. We require our key employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. These agreements generally provide that all confidential information, developed or made known to the individual during the course of the individual's relationship with us, is to be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. We cannot assure investors that employees will not breach such agreements, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known to or be independently developed by competitors. We will require a significant amount of cash to fund our working capital needs and planned expenditures. Our ability to generate cash depends on many factors beyond our control. In the absence of a credit facility as a possible source of liquidity, our ability to meet our working capital needs and to fund capital expenditures will depend on our ability to generate cash from operations and effectively manage our cash balances. This is subject to general economic, financial, competitive and other factors that may be beyond our control. We are unable to predict the outcome of ongoing litigation and investigations to which we are a party and these matters could have a material adverse effect on our liquidity and cash flows. See Note 7, "Litigation and Contingencies," in the notes to the condensed consolidated financial statements for further discussion on legal proceedings. We expect that our cash flows from operations together with cash on hand will be sufficient to satisfy our short-term and, excluding the uncertainty related to the ongoing litigation and investigations to which we are a party, long-term normal operating liquidity requirements; however, we cannot assure you that our business will generate sufficient cash flow from operations in an amount sufficient to enable us to fund our other liquidity needs. As a result, from time to time, we may be required to seek financing from alternative sources. In light of the current capital and credit market disruption and volatility, we cannot assure you that such alternative funding will be available to us on terms and conditions acceptable to us, or at all. In addition, we maintain deposit accounts with numerous financial institutions around the world in amounts that exceed applicable governmental deposit insurance levels. While we actively monitor our deposit relationships, the unanticipated failure of a financial institution in which we maintain deposits could cause us to suffer losses that could materially harm our results of operations and financial condition. Table of Contents We may not be able to keep pace with technological change or successfully develop new products with wide market acceptance, which could cause us to lose business to competitors. We compete in a market characterized by rapidly changing technology. We may not be able to keep pace with technology or to develop viable new products. Our future financial performance will depend in part on our ability to develop and manufacture new products in a cost-effective manner, to introduce these products to the market on a timely basis, and to achieve market acceptance of these products. Factors which may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include capital constraints, research and development delays, and delays in acquiring regulatory approvals. Our new products and new product introductions may fail to achieve expected levels of market acceptance. Factors impacting the level of market acceptance include our ability to successfully implement new technologies, the timeliness of our product introductions, our product pricing strategies, our available financial and technological resources for product promotion and development, our ability to show clinical benefit from our products, and the availability of reimbursement for our products as discussed in the risk factor titled "Changes in coverage and reimbursement for procedures using our products could affect physicians" below. The markets for our products are intensely competitive, which may result in our competitors developing technologies and products that are more effective than ours or that make our technologies and products obsolete. Many of our competitors have significantly greater resources and market power than we do. The markets for our current products in our core businesses are intensely competitive. These markets include arthroscopy, spinal surgery and ENT surgery. We cannot assure you that other companies will not succeed in developing technologies and products that are more effective than ours, or that would render our technologies or products obsolete or uncompetitive in these markets. Our primary competitors across all of our operating units consist of Medtronic, Inc., Smith & Nephew, Stryker Corporation, Johnson & Johnson, Cardinal Health/Allegiance, Olympus (through their subsidiary Gyrus), Arthrex, Inc., Cook Medical and various reprocessing operations. These competitors tend to be large, well-financed companies with diverse product lines who may have significantly greater financial, manufacturing, marketing, distribution and technical resources than we do. Some of these companies offer broad product lines that they may offer as a single package and frequently offer significant price discounts as a competitive tactic. Furthermore, some of our competitors utilize purchasing contracts that link discounts on the purchase of one product to purchases of other products in their broad product lines. Many of the hospitals in the U.S. have purchasing contracts with our competitors. Accordingly, customers may be dissuaded from purchasing our products instead of our competitors' products to the extent the purchase would cause them to lose discounts on our competitors' products. In addition, we are aware of several small companies offering alternative treatments for back pain and other ailments or indications that may indirectly compete with our products. If we were to be unable to continue to compete for any of the above reasons, it could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. Modifications to our currently FDA-cleared products may require new regulatory clearance or approvals or require us to recall or cease marketing our current products until clearances or approvals are obtained. After a device receives 510(k) premarket notification clearance from the FDA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, packaging, and certain manufacturing processes may require a new 510(k) clearance or Premarket Approval, or PMA. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) clearance or PMA Table of Contents approval in the first instance, but the FDA may review any manufacturer's decision and may retroactively require the manufacturer to submit a premarket notification requesting 510(k) clearance or an application for PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval is obtained. FDA guidance documents define when to submit premarket notifications for new or modified devices. These guidance documents also define modifications for which a new 510(k) is not required. We have modified some of our marketed devices, and have determined that in certain instances new 510(k) clearances or PMA approvals are not required. No assurance can be given that the FDA would agree with any of our decisions not to seek 510(k) clearance or PMA approval. If the FDA requires us to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance or PMA approval, our business, financial condition, results of operations and future growth prospects could be materially adversely affected. Failure to obtain FDA clearance or approval for our products could materially adversely affect our business, results of operations, financial condition, and future growth prospects. In the U.S., before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive either premarket clearance under Section 510(k) of the U.S. Federal Food, Drug, and Cosmetic Act, or FDCA, or approval of a PMA submission from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA must determine that a proposed device is "substantially equivalent" to a device legally on the market, known as a "predicate" device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. However, as was the case in our recent submission for 510(k) clearance of Coblator IQ ENT Plasma Wands, the FDA has a high degree of latitude when evaluating submissions and may determine that a proposed device submitted for 510(k) clearance is not substantially equivalent ("NSE") to a predicate device. This NSE determination means that the device is automatically reclassified into Class III and the Company cannot market the device in the U.S unless it is either approved through the PMA process or reclassified into Class I or Class II based on further submissions with supporting data. A new submission may require clinical data. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. Both of these processes can be expensive and lengthy and entail significant user fees, unless exempt. The FDA's 510(k) clearance process usually takes from three to twelve months, but it can last longer. The FDA is currently considering changes to the 510(k) process which may make it more difficult or time consuming to obtain 510(k) clearance. The process of obtaining PMA approval is much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the PMA application is submitted to the FDA until an approval is obtained. There is no assurance that we will be able to obtain FDA clearance or approval for any of our new products on a timely basis, or at all. Failure to obtain FDA clearance or approval for our new products could materially adversely affect our business, results of operations, financial condition, and future growth prospects. We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or "off-label" uses, which would adversely affect our financial condition. Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside its cleared or approved indications is known as "off-label" use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician's choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or Table of Contents enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management's attention and result in substantial damage awards against us. Our products may in the future be subject to product recalls that could harm our reputation, business operations and financial results, and if our products cause or contribute to a death or serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or FDA enforcement actions. The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits. Further, under the FDA medical device reporting regulations, or MDR, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results. If we or our third-party suppliers fail to comply with the FDA's Quality System Regulations, our manufacturing operations could be interrupted and our sales and our ability to generate profits could suffer. We and certain of our third-party suppliers are required to comply with the FDA's Quality System Regulation, or QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. We and our suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we market our products in these jurisdictions. The FDA enforces the QSR through periodic and unannounced inspections of manufacturing facilities. If our facilities or those of our suppliers fail to take satisfactory corrective action in response to an adverse QSR inspection, the FDA could take enforcement action, including any of the following sanctions: untitled letters; warning letters, fines, injunctions, consent decrees and civil penalties; customer notifications or repair, replacement, refunds, recall, detention or seizure of our products; operating restrictions or partial Table of Contents suspension or total shutdown of production; refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products; withdrawing 510(k) clearances on PMA approvals that have already been granted; refusal to grant export approval for our products; or criminal prosecution. Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits. Failure to market our products that use Coblation technology could adversely affect our financial condition, results of operations and future growth prospects. We commercially introduced our Coblation technology product lines in December 1995. Our Coblation technology product lines accounted for more than two-thirds of our product sales in 2009 and the six month period ended June 30, 2010, and we are highly dependent on these sales. We cannot assure you that we will be able to continue to manufacture arthroscopy products based on our Coblation technology in commercial quantities at acceptable costs, or that we will be able to continue to market such products successfully. To achieve increasing disposable device sales over time, we believe we must continue to penetrate the market in other orthopedic procedures, expand physicians' education with respect to Coblation technology, and continue working on new product development efforts. Moreover, our ability to market our products depends on clinical reports and recommendations by influential surgeons supporting our Coblation technology in certain key procedures. We believe that surgeons will not use our products unless they determine, based on experience, clinical data and other factors, that our products are an attractive alternative to conventional means of tissue ablation. We believe that if recommendations and endorsements by influential surgeons cease or long-term data do not support our current claims of efficacy, our business, financial condition, results of operations and future growth prospects could be materially adversely affected. Changes in coverage and reimbursement for procedures using our products could affect use of our devices and our future revenue. The demand for our products is highly dependent on the policies of third-party payors such as Medicare, Medicaid, private insurance, and managed care organizations that reimburse our customers when they use our products. Failure by physicians, hospitals and other users of our products to obtain sufficient coverage and reimbursement from healthcare payors for procedures in which our products are used, or adverse changes in environmental and private third-party payors' policies toward coverage and reimbursement for such procedures would have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In the U.S., third-party payors continue to implement initiatives that restrict the use of certain technologies to those that meet certain clinical evidentiary requirements. We are aware of several third-party payors in the U.S., including governmental payors such as Medicare and Medicaid and private health insurance companies, who consider Coblation technology used in certain procedures to treat certain clinical conditions to be experimental or investigational. These payors have developed policies that deny coverage and therefore make no reimbursement for such procedures using our devices. Procedures using our devices that are not covered by some payors include such procedures as plasma disc decompression, or Coblation nucleoplasty, as well as Coblation or radiofrequency volumetric tissue reduction for (1) removing soft tissue during arthroscopic surgery, (2) hypertrophied nasal turbinates for the treatment of chronic nasal obstruction or obstructive sleep apnea and (3) soft palate and tongue Table of Contents for the treatment of obstructive sleep apnea. However, some payors in the U.S. provide coverage and reimbursement for Coblation tonsillectomy for certain clinical indications and percutaneous vertebroplasty for patients that meet specified criteria. In addition, some payors are moving toward a managed care system and control their health care costs by limiting authorizations for surgical procedures, including elective procedures using our devices. Failure to obtain favorable payor policies could have a material adverse effect on our business and operations. In addition to uncertainties surrounding coverage policies, third-party payors from time to time update reimbursement amounts and also revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to ambulatory surgical centers and physicians for procedures using our products. Because reimbursement for our products generally is included as part of the payments for procedures, these updates directly impact the amounts recognized for the costs of our products. An example of payment updates is the Medicare program updates to physician payments, which is done on an annual basis using a prescribed formula that results in lowered payments for physician services. In the past, Congress has passed legislation to prevent certain reductions in Medicare payments to physicians. Unless Congress does so for 2010, the prescribed formula would result in a 21.5 percent reduction in aggregate Medicare payments to physicians. Legislative proposals have been introduced to revise the statutory formula and prevent the rate reduction. We are unable to predict, however, whether the legislation would be passed or what future changes will be made to compute Medicare payments or reimbursement amounts used by other third-party health care payors. New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing may cause our revenue to decline. In addition, we may need to revise our research and development plans if a program or programs no longer are commercially viable. Such changes could cause our stock price to decline or experience periods of volatility. President Obama signed the Patient Protection and Affordable Care Act in March of 2010. The legislation imposes significant new taxes on medical device makers which will result in a significant increase in the tax burden on our industry, and could have a material, negative impact on our results of operations and our cash flows. Other elements of this legislation such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could significantly change the way healthcare is developed and delivered, and may materially impact many aspects of our business. If we obtain the necessary international regulatory approvals, market acceptance of our products in international markets would be dependent, in part, upon the availability of coverage and reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country and include both government-sponsored health care and private insurance. We intend to seek international reimbursement approvals, although we cannot assure investors that any such approvals will be obtained in a timely manner, if at all. We are also unable to predict at this time the impact on our business of any future changes, if any, that are made to coverage and reimbursement policies by government action in key international markets. Product liability claims could adversely impact our financial condition and impair our reputation. Our business exposes us to potential product liability risks which are inherent in the design, manufacture and marketing of medical devices. In addition, many of our products are designed to be implanted in the human body for long periods of time. Component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to a patient. The occurrence of such a problem could result in product liability claims or a recall of one or more of our products, which could ultimately result in the removal from the body of such products Table of Contents and claims regarding associated costs and damages, which could materially adversely impact our business, financial condition, results of operations, our ability to attract and retain customers for our products, and future growth prospects. We cannot assure you that our current product liability insurance coverage limits are adequate to protect us from any liabilities we might incur in connection with the development, manufacture and sale of our products. In addition, we may require increased product liability coverage as products are successfully commercialized in additional applications. Product liability insurance is expensive and in the future may not be available to us on acceptable terms, if at all. A successful product liability claim or series of claims brought against us in excess of our insurance coverage could have a material adverse effect on our business, financial condition, results of operations, our ability to attract and retain customers for our products, and future growth prospects. We are dependent on key suppliers, and supply disruptions could materially adversely affect our business, financial condition, results of operations and future growth prospects. Some of the key components of our products are purchased from single vendors. If the supply of materials from a single source supplier were interrupted, replacement or alternative sources might not be readily obtainable due to the regulatory and other requirements applicable to our manufacturing operations or the availability of certain product drawings and/or specifications. A new or supplemental filing with applicable regulatory authorities may require us to obtain clearance prior to our marketing a product containing new material. This clearance process may take a substantial period of time and we cannot assure investors that we would be able to obtain the necessary regulatory approval for a new material to be used in our products on a timely basis, if at all. This could create supply disruptions that would materially adversely affect our business, financial condition, results of operations and future growth prospects. In addition, we primarily use a subcontractor located in Costa Rica to sterilize our disposable devices. We have the ability to use alternative sterilization service providers for most of our products. If our Costa Rica sterilization service were to be disrupted for any reason, we would be required to use alternative sources with longer processing and logistics cycles, which could lead to a disruption in our ability to supply products for a period of time. We are dependent on warehouses in the U.S. and Belgium owned and operated by Deutsche Post DHL, Inc. If our ability to use these warehouses is disrupted, we may be unable to supply products to our customers on a timely basis, which could materially adversely affect our business. The complex nature of the underlying support technologies utilized to exchange critical product information with third party transportation and logistics providers, such as "Electronic Data Interchange," has, at times, caused disruptions in our ability to deliver products to customers on a timely basis. Failure of these supporting systems could impair our business for the duration of the failure. Our business is susceptible to risks associated with international operations. International operations are generally subject to a number of risks, including: protectionist laws, business practices, licenses, tariffs and other trade barriers that favor local competition; multiple, conflicting and changing governmental laws and regulations, such as tax laws regulating intercompany transactions; difficulties in managing foreign operations, including staffing, seasonality of operations, dependence on local vendors, and collecting accounts receivable; loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection; foreign currency exchange rate fluctuations; and political and economic instability. Table of Contents We derived 26.1 percent and 25.7 percent of our total product sales for the six months ended June 30, 2010 and 2009, respectively, from customers located outside of the Americas. We expect international revenue to remain a significant percentage of total revenue and we believe that we must continue to expand our international sales activities to be successful. Historically, a majority of our international revenues and costs have been denominated in foreign currencies and we expect future international revenues and costs will be denominated in foreign currencies. Our international sales growth will be limited if we are unable to establish appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, develop relationships with international sales representatives, and establish relationships with additional distributors. In that case, our business, operating results and financial condition could be materially adversely affected. Even if we are able to successfully expand international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products. We require foreign regulatory approvals to market and sell our products in other countries. Failure to obtain and maintain these regulatory approvals would harm our ability to generate revenue. To be able to market and sell our products in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals is expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our products. If we fail to obtain or maintain regulatory approval in any foreign country in which we plan to market our products, our ability to generate revenue will be harmed. Disruptions or other adverse developments at our Costa Rica facility could materially adversely affect our business. Our high-volume disposable devices and controllers are manufactured at our Company-owned facility in an industrial park in San Jose, Costa Rica. If our Costa Rica facility is not able to produce sufficient quantities of our controllers and products with adequate quality, or if our Costa Rica operations are disrupted for any reason, then we may be forced to locate alternative manufacturing facilities, including facilities operated by third parties. Disruptions may include, but are not limited to: changes in the legal and regulatory environment in Costa Rica; slowdowns or work stoppages within the Costa Rican customs authorities; acts of God (including but not limited to potential disruptive effects from an active volcano near the facility or earthquakes, hurricanes and other natural disasters); and other issues associated with significant operations that are remote from our headquarters and operations centers. Additionally, continued growth in product sales could outpace the ability of our Costa Rican operation to supply ordered products on a timely basis or cause us to take actions within our supply and manufacturing operations which increase costs, complexity and timing. Locating alternative facilities would be time-consuming, would disrupt our production and cause shipment delays and could result in damage to our reputation and profitability. Additionally, we cannot assure you that alternative manufacturing facilities would offer the same cost structure as our Costa Rica facility. Future changes in technology or market conditions could result in adjustments to our recorded asset balance for intangible assets, including goodwill, resulting in additional charges that could significantly impact our operating results. Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of related estimated useful lives and whether these assets are impaired involves significant judgments. Our ability to accurately predict future cash flows related to these intangible assets may be adversely affected by unforeseen and uncontrollable events. In the highly competitive medical device industry, new technologies could impair the value of our intangible assets if Table of Contents they create market conditions that adversely affect the competitiveness of our products. We test our goodwill for impairment in the fourth quarter of each year, but we also test goodwill and other intangible assets for impairment at any time when there is a change in circumstances that indicates that the carrying value of these assets may be impaired. Any future determination that these assets are carried at greater than their fair value could result in substantial non-cash impairment charges, which could significantly impact our reported operating results. If we fail to effectively manage our growth, then our business, financial condition and operating results could be adversely affected. Our business has grown in size and complexity over the past few years as a result of internal growth. This growth and increase in complexity have placed significant demands on financial and managerial controls, reporting systems and procedures. In addition, we continue to explore ways to extend our target markets. We will need to continue to improve our financial and managerial controls, reporting systems and procedures as we continue to grow and expand our business. To meet such demands, we intend to continue to invest in new technology, make other capital expenditures, develop management and operating systems, and, where appropriate, hire, train, supervise and manage employees with expertise to handle these particular demands. If we fail to efficiently manage operations in a way that accommodates continued internal growth, our business, financial condition and operating results could be adversely affected. Delaware law and provisions in our charter could make the acquisition of our company by another company more difficult, which could adversely affect our stock price. Certain provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. This could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock. Certain provisions of our certificate of incorporation and bylaws allow us to issue preferred stock without any vote or further action by the stockholders, to eliminate the right of stockholders to act by written consent without a meeting, to specify advance notice and other procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings, and to eliminate cumulative voting in the election of directors. Certain provisions of Delaware law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving us, including Section 203, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. The procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of the company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our Common Stock. These provisions of Delaware law, our certificate of incorporation, and our bylaws may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of our stock. One Equity Partners, a private equity firm, may have influence on our major corporate decisions. As previously reported, on September 1, 2009, an affiliate of One Equity Partners, or OEP, a private equity firm, acquired our Series A Preferred Stock. See "Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" in our 2009 Form 10-K for a description of this transaction. As a result of this transaction, OEP became the largest beneficial owner of our stock. At this time, assuming conversion of the Series A Preferred Stock to our Common Stock, including make-whole amounts as defined in the Certificate of Designation for the Series A Preferred Stock but excluding outstanding options and Table of Contents warrants held by other parties, OEP would represent an ownership interest of approximately 17.7 percent of our voting stock. In connection with this transaction, we expanded the Board of Directors to eight members and granted OEP the right to nominate two directors. Effective September 1, 2009, Messrs. Gregory Belinfanti and Christian Ahrens, both partners of OEP, were appointed to our Board of Directors. Consequently, OEP may have the ability to influence our Board of Directors and matters requiring stockholder approval, subject to the restrictions placed on OEP by the Securities Purchase Agreement, including without limitation OEP's agreement to vote for any director nominated by the Board and to comply with the terms of the standstill. From and after the first anniversary of the investment, OEP is free to convert the Series A Preferred Stock into our Common Stock and, subject to the registration requirements of the federal securities laws, dispose of such stock, which could result in a decrease of the market price of our Common Stock, particularly if such dispositions are made in the open market and are substantial. We may not be able to comply with the redemption rights, registration rights, and other rights of our holders of Series A Preferred Stock and our obligations under the Registration Rights Agreement with our holders of Series A Preferred Stock. After September 1, 2014, or in connection with a change in control, the holders of our Series A Preferred Stock may require us to redeem any or all outstanding shares of Series A Preferred Stock at the liquidation preference of such redeemed Series A Preferred Stock including any applicable make-whole adjustment. We may not have sufficient liquidity to comply with the redemption right of our holders of Series A Preferred Stock at that time if such right is exercised. Alternatively, if we are able to comply with the redemption right of the holders of our Series A Preferred Stock, we may have insufficient remaining liquidity to conduct our business, which would materially adversely affect our business, liquidity, and financial condition. In addition, pursuant to the Registration Rights Agreement between us and the holders of our Series A Preferred Stock, if a registration statement is not timely filed or does not become effective in accordance with the requirements of the Registration Rights Agreement, a Registration Default, then we shall pay the holders of the Series A Preferred Stock 2.00 percent per annum of the original liquidation preference of the Series A Preferred Stock, accruing from the date of the Registration Default until the Registration Default is cured. We are dependent upon key management, technical personnel and advisors, and loss of our key personnel and advisors could have a material adverse effect on our business and results of operations. The loss of the services of one or more key employees or consultants could have a material adverse effect on us. Our success also depends on our ability to attract and retain additional highly qualified management and technical personnel. We face intense competition for qualified personnel, any of whom often receive competing employment offers. We cannot assure you that we will continue to be able to attract and retain such personnel. The process related to the restatement of our financial results has impacted the amounts, timing and forms of employee compensation. These impacts could materially impact our ability to attract and retain essential managerial and technical personnel. Loss of key personnel would materially impact our ability to meet our financial and operational objectives and could have a material adverse effect on our business and our results of operations. Circumstances associated with our integration of acquisitions may adversely affect our operating results. An element of our growth strategy has been and in the future may be the pursuit of acquisitions of other businesses that expand or complement our existing products and distribution channels. Integrating businesses, however, involves a number of special risks, including: the possibility that Table of Contents management attention may be diverted from regular business concerns by the need to integrate operations; unforeseen costs, difficulties and liabilities in integrating our and the acquired company's employees, operations and systems; accounting, regulatory, or compliance issues that could arise in connection with, or as a result of, the acquisition of the acquired company; challenges in retaining our customers or the customers of the acquired company following the acquisition; the difficulty of incorporating acquired technology and rights into our products and services; and impairment charges if our acquisitions are not successful due to these risks. In addition, we may incur debt to finance future acquisitions and may issue securities in connection with future acquisitions, which may dilute the holdings of our current and future stockholders. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our business, financial condition or operating results may be adversely affected. Our operating results may fluctuate. In our experience, our results of operations may fluctuate significantly from period to period. Adverse fluctuations due to these factors may adversely affect our level of revenues and profitability, results of operations, financial condition, and future growth prospects in the short and long term: the introduction of new product lines and increased penetration in existing applications; achievement of research and development milestones; the amount and timing of expenditures and the receipt and recognition of license fees; and timing of the receipt of orders and product shipments, absence of a backlog of orders, and the rate of product returns. Factors may make the market price of our stock highly volatile. The market price of our Common Stock could fluctuate substantially in the future. Investors may be unable to resell our Common Stock at or above their purchase price. This volatility may subject our stock price to material fluctuations due to the factors discussed in this "Risk Factors" section, and other factors including market reaction to acquisitions and trends in sales, marketing, and research and development; rumors or dissemination of false information; changes in coverage or earnings estimates by analysts; our ability to meet analysts' or market expectations; and sales of Common Stock by existing stockholders. As previously reported, as of September 1, 2009, OEP owns all of our outstanding Series A Preferred Stock. From and after the first anniversary of its investment, or September 1, 2010, OEP may convert the Series A Preferred Stock into our Common Stock and, subject to the registration requirements of the federal securities laws, dispose of such stock, which could result in a decrease of the market price of our Common Stock, particularly if such dispositions are made in the open market and are substantial. Risks Related to Our Common Stock Factors may make the market price of our stock highly volatile. The market price of our Common Stock could fluctuate substantially in the future. Investors may be unable to resell our Common Stock at or above their purchase price. This volatility may subject our stock price to material fluctuations due to the factors discussed in this "Risk Factors" section, and other factors including market reaction to acquisitions and trends in sales, marketing, and research and development; rumors or dissemination of false information; changes in coverage or earnings estimates by analysts; our ability to meet analysts' or market expectations; and sales of Common Stock by existing stockholders. As previously reported, as of September 1, 2009, OEP owns all of our outstanding Series A Preferred Stock. From and after the first anniversary of its investment, or September 1, 2010, OEP may Table of Contents convert the Series A Preferred Stock into our Common Stock and, subject to the registration requirements of the federal securities laws, dispose of such stock, which could result in a decrease of the market price of our Common Stock, particularly if such dispositions are made in the open market and are substantial. The Common Stock registered in this offering will be freely tradable upon OEP's conversion of the Series A Preferred Stock into our Common Stock and the effectiveness of the registration statement relating to this offering. The sale of a significant amount of Common Stock registered in this offering at any given time could cause the trading price of our Common Stock to decline and be highly volatile. Future issuances or other dilution of our equity securities, or sales of our securities by stockholders in the public market, may cause the price of our Common Stock to decline or impair our ability to raise capital in the equity markets. In the future, we may issue additional shares of our common or preferred stock in public or private offerings. Shares of our Common Stock are available for future sales pursuant to stock options and restricted stock that we have granted to certain employees, directors and consultants, and in the future we may grant additional stock options and/or restricted stock to our employees, directors and consultants. We are not restricted from issuing additional Common Stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock or any substantially similar securities. In addition, the 75,000 shares of Series A Preferred Stock that we have issued to OEP are convertible into 5,805,921 shares of Common Stock, and OEP is entitled to receive dividends of additional shares of Series A Preferred Stock pursuant to the Certificate of Designations of the Series A Preferred Stock, which will cause significant dilution to current stockholders. Such issuances of our Common Stock or preferred stock could dilute the voting power and ownership interest of our current common stockholders and adversely affect the market price of our Common Stock. Furthermore, the sale of a substantial amount of Common Stock shares by OEP or other stockholders in the market during or after the resale transactions described in this prospectus and any related prospectus supplement, or the perception that such sales could occur, may cause prevailing market prices for our Common Stock to decline and may adversely affect our ability to raise additional capital in the financial markets at a time and price favorable to us. Table of Contents

parsed_sections/risk_factors/2010/CIK0001013796_tib_risk_factors.txt ADDED Viewed

	@@ -0,0 +1 @@

+ RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained or incorporated by reference into this prospectus, including the information contained in the section entitled Risk Factors in our 2009 Form 10-K, our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2010 and September 30, 2010, and any risks described in our other filings with the SEC, pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act before making a decision to invest in our common stock. The risks described below and in the documents referred to in the preceding sentence are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of the following risks actually occurs, our business, results of operations and financial condition could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Relating to the Rights Offering The subscription price determined for the rights offering is not an indication of the value of our common stock. The Investment Agreement required the subscription price to be $0.15 per share, which, adjusted for the Reverse Stock Split, is the $15.00 per share price of this rights offering. The Subscription Price is not necessarily related to our book value, results of operations, cash flows, financial condition or the future market value of our common stock. We cannot assure you that the trading price of our common stock will not decline during or after the rights offering. We also cannot assure you that you will be able to sell shares purchased in the rights offering at a price equal to or greater than the Subscription Price. We do not intend to change the Subscription Price in response to changes in the trading price of our common stock prior to the closing of the rights offering. Because we do not have any formal commitments from any of our shareholders to participate in the rights offering and because no minimum subscription is required, we cannot assure you of the amount of proceeds, if any, that we will receive from the rights offering. We do not have any formal commitments from any of our shareholders to participate in the rights offering and there is no minimum subscription required. We cannot assure you that any of our shareholders will exercise all or any part of their subscription privilege. Therefore, we cannot assure you of the amount of proceeds that we will receive. If our shareholders subscribe for fewer shares of our common stock than anticipated, the net proceeds we receive from the rights offering could be reduced and we could incur damage to our reputation. The rights offering may cause the price of our common stock to decline. Depending upon the trading price of our common stock at the time of our announcement of the rights offering, the announcement of the rights offering and its terms, including the subscription price, together with the number of shares of common stock we could issue if the rights offering is completed, may result in a decrease in the trading price of our common stock. This decrease may continue after the completion of the rights offering. If that occurs, your purchase of shares of our common stock in the rights offering may be at a price greater than the prevailing trading price. Because you may not revoke or change your exercise of the subscription rights unless we are required by law to permit revocation, you could be committed to buying shares above the prevailing trading price at the time the rights offering is completed, even if you later learn information about us that you consider unfavorable. Once you exercise your subscription rights, you may not revoke or change the exercise unless we are required by law to permit revocation. The trading price of our common stock may decline before the subscription rights expire. If you exercise your subscription rights and, afterwards, the trading price of our common stock decreases below the Subscription Price, you will have committed to buying shares of our common stock at a price above the prevailing trading price and could have an immediate unrealized loss. In addition, if you exercise your subscription rights and later learn information about us that you consider unfavorable, you will be committed to buying shares and may not revoke or change your exercise. However, notwithstanding any election forms received from participants (and other account holders) in the 401(k) Plan regarding the exercise of their subscription rights held by (or through) the 401(k) Plan, no subscription rights held by (or through) the 401(k) Plan will be exercised if Table of Contents the closing price of our common stock on January 7, 2011, as reported by NASDAQ, is not greater than or equal to the Subscription Price. For additional information, see The Rights Offering Special Instructions for Participants in Our 401(k) Plan. Our common stock is traded on the NASDAQ under the symbol TIBB, and the closing sale price of our common stock on the NASDAQ on December 16, 2010 was $[ ] per share. (Our common stock will have a D appended to its ticker symbol to indicate the completion of the Reverse Stock Split, for a period of 20 trading days following the effectiveness of the Reverse Stock Split.) There can be no assurances that the trading price of our common stock will equal or exceed the Subscription Price at the time of exercise or at the Expiration Date. See also Risks Relating to Ownership of Our Common Stock As of September 30, 2010, the Company did not meet the $1.00 minimum bid price requirement for continued listing on the NASDAQ Global Select Market and may be delisted. You may not be able to resell any shares of our common stock that you purchase pursuant to the exercise of subscription rights immediately upon expiration of the subscription rights offering period or be able to sell your shares at a price equal to or greater than the Subscription Price. If you exercise your subscription rights, you may not be able to resell the common stock purchased by exercising your subscription rights until your account has been credited with those shares. Moreover, you will have no rights as a shareholder of the shares you purchased in the rights offering until we issue the shares to you. Although we will endeavor to issue the shares as soon as practicable after completion of the rights offering, after all necessary calculations have been completed, there may be a delay between the expiration date of the rights offering and the time that the shares are issued. In addition, we cannot assure you that, following the exercise of your subscription rights, you will be able to sell your common stock at a price equal to or greater than the Subscription Price. If you do not exercise your rights, you will suffer dilution. If you do not exercise your rights or you exercise less than your full subscription privilege, and other shareholders fully exercise their rights or exercise a greater proportion of their subscription privilege than you exercise, you will suffer dilution of your percentage ownership of our equity securities relative to such other shareholders. As of the record date, there were 14,887,922 pre-split shares of our common stock outstanding, equivalent to 148,880 shares of common stock after adjusting for the impact of the Reverse Stock Split. Based on the number of shares of common stock outstanding as of December 16, 2010 (which takes into account the Reverse Stock Split effected on December 15, 2010), and assuming that no options are exercised and there are no other changes in the number of outstanding shares prior to the expiration of the rights offering, if we issue all 1,488,792 shares of common stock available in the rights offering, we would have 13,304,339 shares of common stock outstanding immediately following the completion of the rights offering. We may cancel the rights offering at any time before the completion of the rights offering, and neither we nor the subscription agent will have any obligation to you except to return your subscription payment, without interest or penalty. We may at our sole discretion cancel the rights offering at any time before the completion of the rights offering. If we elect to cancel the rights offering, neither we nor the subscription agent will have any obligation with respect to the subscription rights except to return to you, without interest or penalty, as soon as practicable, any subscription payments. If you do not act promptly and follow the subscription instructions, your exercise of subscription rights will be rejected. Shareholders that desire to purchase shares in the rights offering must act promptly to ensure that all required forms and payments are actually received by the subscription agent, and all payments clear, prior to the Expiration Date. If you are a beneficial owner of shares, you must act promptly to ensure that your broker, dealer, custodian bank or other nominee acts for you and that all required forms and payments are actually received by the Table of Contents subscription agent prior to the expiration of the rights offering period. We are not responsible if your broker, dealer, custodian bank or nominee fails to ensure that all required forms and payments are actually received by the subscription agent, and all payments clear, prior to the expiration of the rights offering period. If you fail to complete and sign the required subscription forms, send an incorrect payment amount or otherwise fail to follow the subscription procedures that apply to your exercise in the rights offering or your payment does not clear prior to the Expiration Date, the subscription agent may, depending on the circumstances, reject your subscription or accept it only to the extent of any payment that has been received and has cleared. Neither we nor the subscription agent will undertake to contact you concerning, or attempt to correct, an incomplete or incorrect subscription form. We have the sole discretion to determine whether the exercise of your subscription rights properly and timely follows the subscription procedures. If you are a participant (or other account holder) in our 401(k) Plan, you may exercise your subscription rights that are held by your 401(k) Plan account by properly completing the special election form, called the 401(k) Plan Participant Election Form, that is provided to you by the Ingham Retirement Group. You must return your completed 401(k) Plan Participant Election Form to the Ingham Retirement Group in the manner prescribed in the materials provided to you by January 4, 2011. If your 401(k) Plan Participant Election Form is not received by such special deadline, your election to exercise the subscription rights that are held by your 401(k) Plan account will not be effective. See The Rights Offering Special Instructions for Participants in Our 401(k) Plan. If you fail to complete the 401(k) Plan Participant Election Form correctly, you may be unable to participate in the rights offering. Neither we, the Ingham Retirement Group, the subscription agent, the information agent, the 401(k) Plan s trustee nor anyone else is under any duty to notify you of any defect or irregularity in connection with your submission of the 401(k) Plan Participant Election Form, and we will not be liable for failure to notify you of any defect or irregularity. If you elect to exercise some or all of the subscription rights in your 401(k) Plan account, you must also ensure that the total amount of the funds required for such exercise has been allocated to the Fidelity Retirement Money Market Fund in your 401(k) Plan account by 4:00 p.m., New York City time, on January 4, 2011 and until liquidated into cash (generally, on or about January 6, 2011). Also note that, notwithstanding any election that you make regarding the exercise of the subscription rights held by your 401(k) Plan account, your subscription rights will not be exercised with respect to shares held through the 401(k) Plan if the per share closing price of our common stock on January 7, 2011, as reported by NASDAQ, is not greater than or equal to the Subscription Price. For additional information, see The Rights Offering Special Instructions for Participants in Our 401(k) Plan. If you make payment of the subscription price by uncertified personal check, your check may not clear in sufficient time to enable you to purchase shares in the rights offering. Any uncertified personal check used to pay the subscription price in the rights offering must clear prior to the Expiration Date, and the clearing process may require five or more business days. As a result, if you choose to use an uncertified personal check to pay the subscription price, it may not clear prior to the Expiration Date, in which event you would not be eligible to exercise your subscription rights. You may eliminate this risk by paying the subscription price by certified or cashier s check or bank draft drawn on a U.S. bank or by a U.S. postal or express money order. The rights are non-transferable and thus there will be no market for them. You may not sell, transfer or assign your rights to anyone else. We do not intend to list the rights on any securities exchange or any other trading market. Because the subscription rights are non-transferable, there is no market or other means for you to directly realize any value associated with the subscription rights. Our 401(k) Plan, which is receiving subscription rights, is not permitted to acquire, hold or dispose of subscription rights absent an exemption from the DOL. The 401(k) Plan is receiving subscription rights with respect to the shares of common stock held by the 401(k) Plan on behalf of the participants (and other account holders) as of the record date even though 401(k) Plans and other plans subject to ERISA, such as ours, are not permitted under ERISA or Section 4975 of the Code to acquire, hold or dispose of subscription rights absent an exemption from the DOL. We plan to submit a request to the DOL that an exemption be granted on a retroactive basis, effective to the commencement of the rights offering, Table of Contents with respect to the acquisition, holding and exercise of the subscription rights by the 401(k) Plan and its participants (and other account holders); however, the DOL may deny our exemption application. If our exemption request is denied by the DOL, the DOL may require us to take appropriate remedial action and the Internal Revenue Service and DOL could impose certain taxes and penalties on us. Our management will have broad discretion over the use of the net proceeds from the rights offering, and we may not invest the proceeds successfully. We currently intend to use the net proceeds from the rights offering for general corporate purposes, which may include investment in TIB Bank. Accordingly, you will be relying on the judgment of our management with regard to the use of the proceeds from the rights offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. It is possible that we may invest the proceeds in a way that does not yield a favorable, or any, return for us. Risks Relating to Ownership of Our Common Stock NAFH is a controlling shareholder and may have interests that differ from the interests of our other shareholders. Upon completion of the NAFH Investment, and before accounting for any stock that may subsequently be issued pursuant to the Warrant or this rights offering, NAFH owned approximately 99% of the Company s outstanding voting power. As a result, NAFH will be able to control the election of our directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our shareholders for approval. Such transactions may include mergers and acquisitions (which may include mergers of the Company and/or its subsidiaries with or into NAFH and/or NAFH s other subsidiaries), sales of all or some of the Companys assets (including sales of such assets to NAFH and/or NAFH s other subsidiaries) or purchases of assets from NAFH and/or NAFH s other subsidiaries, and other significant corporate transactions. Five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliates of NAFH. NAFH also has sufficient voting power to amend our organizational documents. The interests of NAFH may differ from those of our other shareholders, and it may take actions that advance its interests to the detriment of our other shareholders. Additionally, NAFH is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. NAFH may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. This concentration of ownership could also have the effect of delaying, deferring or preventing a change in our control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of our common stock, and the trading prices of our common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price. As a controlled company, we are exempt from certain NASDAQ corporate governance requirements. Our common stock is currently listed on the NASDAQ. The NASDAQ generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under the rules applicable to the NASDAQ, if another company owns more than 50% of the voting power for the election of directors of a listed company, that company is considered a controlled company and exempt from rules relating to independence of the board of directors and the compensation and nominating committees. We are a controlled company because NAFH owns more than 50% of our voting power for the election of directors. Accordingly, we are exempt from certain corporate governance requirements and holders of our common stock may not have all the protections that these rules are intended to provide. Market conditions and other factors may affect the value of our common stock, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive. The trading price of our common stock may fluctuate significantly as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. Among the factors that could affect our stock price are: our financial condition, performance, creditworthiness and prospects; Table of Contents changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to our common stock or those of other financial institutions; failure to meet analysts loan and deposit volume, revenue, asset quality or earnings expectations; speculation in the press or investment community generally or relating to our reputation or the financial services industry; actions by our current shareholders, including sales of common stock by existing shareholders and/or directors and executive officers; fluctuations in the stock price and operating results of our competitors; proposed or adopted regulatory changes or developments; investigations, proceedings, or litigation that involve or affect us; market interest rates; our past and future dividend practice; conditions in the regional and national credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; or changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility. We have suspended payment of cash dividends on our common stock and may not pay any cash dividends on our common stock for the foreseeable future. Under the terms of our trust preferred securities, the Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. During the third quarter of 2009, we began deferring dividend payments on our trust preferred securities pursuant to the adoption of a board resolution requiring 30-day advance notice to and written approval from the Federal Reserve Board prior to making any dividend payments. On September 22, 2010 the Federal Reserve Bank of Atlanta and the Company entered into a written agreement where we agreed, among other things, that we would not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the Federal Reserve Bank of Atlanta. There is no assurance that we will receive approval to resume paying cash dividends. Even if allowed to resume paying dividends by the Federal Reserve Board, future payment of cash dividends on our common stock, if any, will be subject to the prior payment of all unpaid dividends and deferred distributions on our trust preferred securities. All dividends are declared and paid at the discretion of our board of directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements and such other factors as our board of directors may deem relevant. Even if we do declare a payment of dividends in the future, there is no assurance that we will continue to pay such dividends or that we will not cancel future payments of dividends. We are a holding company and depend on our subsidiaries for dividends, distributions and other payments. Substantially all of our activities are conducted through our subsidiaries. One of the principal sources of funds from which we service debt and pay our obligations and dividends is the receipt of dividends from TIB Bank. The Consent Order issued by the FDIC and the State of Florida Office of Financial Regulation on July 2, 2010 prohibits TIB Bank from paying a dividend or making a capital distribution without the prior written consent of those regulatory agencies. Table of Contents Future issuance or sales of our common stock or other securities, including through exercise of NAFH s Warrant, will dilute the ownership interests of our existing shareholders and could depress the market price of our common stock. NAFH received, in connection with the Investment, a warrant representing the right to purchase, during the 18-month period following the closing of the Investment, up to 11,666,667 shares of our common stock at $15.00 per share, subject to anti-dilution adjustments. If NAFH exercises the Warrant for shares of our common stock, whether in part or in full, shareholders other than NAFH will suffer dilution of their common shares. Further, although we presently do not have any intention of issuing additional common stock apart from the issuances contemplated by the Investment, we may do so in the future in order to meet our capital needs and regulatory requirements, and will be able to do so without shareholder approval, up to the newly increased number of authorized shares. Our board of directors may determine from time to time a need to obtain additional capital through the issuance of additional shares of common stock or other preferred securities including securities convertible into or exchangeable for shares of our common stock, subject to limitations imposed by the NASDAQ and the Federal Reserve Board. There can be no assurance that such shares can be issued at prices or on terms better than or equal to the terms obtained by our current shareholders. The issuance of any additional shares of common stock or convertible or exchangeable preferred securities by us in the future may result in a reduction of the per share book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock or convertible or exchangeable preferred securities will reduce the proportionate ownership and voting power of our existing shareholders. As of September 30, 2010, the Company did not meet the $1.00 minimum bid price requirement for continued listing on the NASDAQ Global Select Market and may be delisted. On July 7, 2010, the Company received a delisting notice from the NASDAQ Stock Market LLC, which was anticipated, due to the Company s non-compliance with the NASDAQ s $1.00 per share bid price requirement. The letter from the NASDAQ notified the Company that it was in violation of NASDAQ Marketplace Rule 5505 in that the bid price for its common stock was below the required listing standard and that its common stock would be delisted from NASDAQ on July 16, 2010 unless the Company asked for a hearing before a NASDAQ Listing Qualifications Hearing Panel. This hearing was held on August 5, 2010. During the hearing the Company requested an extension to January 3, 2011 for the Company to demonstrate a closing bid price of $1.00 per share in accordance with the NASDAQ rules. The Company advised the NASDAQ that the Company intended to call a special meeting of its shareholders following the closing of the NAFH investment to approve the adoption of an amendment to the Company s Restated Articles of Incorporation to effect a reverse stock split and thereby regain compliance with the listing rules. On September 2, 2010, the Company was advised by the NASDAQ that its request for an extension to January 3, 2011 was granted. On December 15, 2010, the Company effected a reverse stock split of its common stock at a ratio of 1:100, and as of December 16, 2010, the closing price of the Company s common stock was $[ ]. However, there can be no assurance that the Company will be able to demonstrate compliance with the NASDAQ rules during the ten consecutive trading days necessary for the Company to regain compliance with NASDAQ rules, nor can there be any assurance that the Company s common stock will not, in the future, again fall below the $1.00 per share threshold. Accordingly, there can be no assurance that the shares of the Company s common stock will not be delisted. We may choose to voluntarily delist our common shares from NASDAQ. Even if the NASDAQ permits us to remain as a listed company, we may choose to, or our majority shareholder NAFH may cause us to, voluntarily delist from the NASDAQ Global Select Market. If we were to delist ourselves from the NASDAQ, we may or may not list ourselves on another exchange. In either case, a delisting of our common stock could negatively impact you by reducing the liquidity and market price of our common stock and potentially reducing the number of investors willing to hold or acquire our common stock. In addition, if we were to delist from the NASDAQ, we would no longer be subject to any of the corporate governance rules applicable to NASDAQ listed companies. See also As a controlled company, we are exempt from certain NASDAQ corporate governance requirements. Table of Contents The trading volume in our common stock has been low and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock. Our common stock is thinly traded. Trading volume may remain low as a result of the Investment and NAFH s acquisition of a majority stake in the Company. Thinly traded stock can be more volatile than stock trading in an active public market. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices or times that they desire. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock. Holders of our junior subordinated debentures have rights that are senior to those of our common shareholders. We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. At September 30, 2010, we had outstanding trust preferred securities and accompanying junior subordinated debentures with a face amount totaling $33.0 million. Payments of the principal and interest on the trust preferred securities of these special purpose trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the special purpose trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer, and since October 2009 have been deferring, distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock. Resales of our common stock or other securities in the public market may cause the market price of our common stock to fall. Sales of a substantial number of shares of our common stock or convertible or exchangeable preferred securities in the public market by our shareholders (including NAFH), or the perception that such sales are likely to occur, could cause the market price of our common stock to decline. Pursuant to the Investment Agreement, we have agreed to provide customary registration rights for the shares of common stock issued to NAFH, including the common stock into which the Preferred Stock will be converted, and NAFH can exercise those rights in order to sell additional shares of our common stock at its discretion. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock. Anti-takeover provisions could negatively impact our shareholders. Provisions of Florida law and of our charter and Bylaws (which are described in more detail in the section entitled Description of Capital Stock ) could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. Table of Contents